Microsoft (NASDAQ:) is no longer the start-up once it was, growing by leaps and bounds.

However, it continues to grow at healthy rates and generates ample free cash flow that may drive its shares higher. The stock is a strong buy.

The software company announced on September 15 a $60 billion share buyback program, and an 11% dividend increase. For listed companies, dividend hikes and share buybacks are generally bullish in the long-term. (See MSFT stock charts on TipRanks)

Strong Growth, Rising Free Cash Flow

Large companies do not usually grow their revenues at double-digit rates for a long time. Microsoft’s 2018 revenues increased 14.3%, 13.6% and 17.5% respectively in 2019.

In 2018, free cash flow rose by 18.6%, 18.2% and 24.1% respectively. The net income that companies generate after investing in their operations and the reproduction of their assets is called free cash flow.

The funds are available for various purposes that could increase shareholder value. Equity analysts must pay attention to this crucial financial metric.

Wall Street has Taken Notice

Wall Street has taken notice of Microsoft’s strong growth, and rising free cash flow. In the five-year period, Microsoft’s share prices have risen by 453.8%.

As the valuation starts to seem a bit too high, investors are feeling optimistic. For example, Microsoft’s shares are trading at 33 times of next six-month earnings, about twice the average.

Plenty of Opportunities, Strong Moats

Microsoft’s stellar performance is the result of plenty of opportunities and strong moats.

According to Satya Nadella (its CEO), Microsoft’s future opportunities are based on riding the second “wave” of digitalization.

His statement was, “What have we seen in the last year? The dawn of the second waves of digital transformation sweeping all companies and industries.” The new currency that drives every organisation’s resilience, growth, and success is their digital ability. Microsoft’s cloud platform is the most extensive and comprehensive in the world, and it’s driving this change.

Microsoft also has strong barriers (barriers of entry to preserve and protect its competitive advantage) such as economies of networking and the benefits that come with a wide network of users. Microsoft is also able to bundle different products so they can all be sold to one customer.

Microsoft’s moats are effective in keeping competition away, but also allow the company to have great pricing power. This is evident by last month’s decision to increase its product prices.

Analyst’s Take

Equity analysts are on the same side of Wall Street. The analysts rate Microsoft Strong Buy with an average price target at $334.55. This implies 13.1% potential upside.

Bottom Line

At the right time, Microsoft is in the right place with the right business model to grow its business, and generate plenty of free cash flow to boost shareholder value.

Disclosure: Panos Mourdoukoutas was a Microsoft employee at the time this article was published.

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