On a red day for the stock market, Microsoft (NASDAQ: MSFT) In any case, investors were happy to hear that CFRA analyst Angelo Zino raised his price target for Microsoft stock to $475 per share.
You’ll no doubt be shocked to learn that the reason he raised his price target has something to do with artificial intelligence (AI).
Are Microsoft Stocks a Buy?
Zino specifically argued that Microsoft’s Azure cloud computing division — already the company’s largest business in terms of both revenue and profit, with $37.9 billion in revenue on last year’s $87.9 billion revenue — has grown by another 29% in the first quarter of 2024. Zino says AI work contributed to 8 percentage points of growth.
Combined with contributions from Activision, which is now owned by Microsoft, the analyst predicts that Microsoft will earn $11.74 per share this year ($0.10 before consensus) and will grow 14% to 15% each of the next two years to grow.
That’s pretty solid growth for a behemoth like Microsoft. And yet, despite raising his estimates and price target for Microsoft — despite predicting the stock will rise 15% this year — Zino still rates Microsoft stock a “sell.”
Why is that?
It’s not entirely clear, but I can at least tell you why I I’m leery of Microsoft stock. First, consider that Microsoft’s $82.5 billion in reported net revenue overstates the cash the company generates ($67.4 billion in remaining free cash flow). [FCF]) with 22%. In fact, it’s been three years since Microsoft last generated FCF that matched reported profits.
Valued at FCF, Microsoft shares trade at a multiple of 45x. But Microsoft isn’t growing nearly fast enough to justify that valuation. As Zino says, the stock will only grow an average of 15% over the next few years (and that’s faster than other analysts estimate).
Long story short: Microsoft is a very profitable company and growing rapidly for its size. But free cash flow is disappointing and is expected to lag reported profits for years to come. I’m more inclined to sell it than buy it.
Where you can invest $1,000 now
If our analyst team has a stock tip, it could be worth listening to. The newsletter they have been publishing for twenty years, Motley Fool stock advisorhas more than tripled the market.*
They just revealed what they believe to be the 10 best stocks for investors to buy now… and Microsoft made the list – but there are nine other stocks you might be overlooking.
View the 10 stocks
*Stock Advisor returns April 15, 2024
Rich Smith has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
Will Microsoft Stock Go to $475? 1 Wall Street Analyst Thinks So was originally published by The Motley Fool
