Where Will MSFT Stock Be In 10 Years?

When Steve Ballmer took over from Bill Gates as head of Microsoft (NASDAQ:MSFT), investors were hopeful that he would lead the company from strength to strength. Those high hopes were dashed as Ballmer famously made a series of gaffes, including dismissing the threat of the iPhone from Apple.

At the time, there was a real risk that Microsoft would follow in the footsteps of IBM and enter a period of slow or no growth, stagnating, and failing to innovate. Then, along came Satya Nadella, a new CEO with a fresh vision to transform Microsoft from a company that shipped Windows operating system discs to a cloud provider.

As we look back at his time at the helm, it’s evident that he has succeeded in realizing his original vision, and appears to be just getting started.

Far from following in the footsteps of Big Blue, Microsoft has etched its place in technology history as a titan to be reckoned with that can easily go toe-to-toe with any of the technology heavyweights, from Apple (NASDAQ:AAPL) to Alphabet (NASDAQ:GOOGL).

Microsoft has been so successful that it is second only to Apple in terms of market capitalization, currently sitting pretty with a $2.4 trillion valuation. But what now? Where will MSFT stock be in 10 years? 

Microsoft Is a Cash Flow Machine

In 2014 when Satya Nadella succeeded Steve Ballmer as CEO, Microsoft reported revenues of $86.8 billion. Thereafter, the company grew revenues every year over the subsequent decade with only one stumble in 2016 when the top line fell backwards by “just” 2.6%.

To get a sense of how well Satya has executed, you need only look to the growth figures over the past five fiscal years, which were reported at 14.0% in 2019, 13.6% in 2020, 17.5% in 2021, 18.0% in 2022 and 6.9% in 2023.

The $86.8 billion from 2014 looks minuscule when compared to the enormous $211.9 billion reported during the past fiscal year.

To give a sense of the accomplishment, Microsoft was founded in 1975, so it took 39 years to generate the first $86 billion annually but only another 10 years to more than double that figure. 

And unlike some companies that hurt margins to grow, Microsoft has maintained a steady gross margin over the past decade as it has almost 3x’ed its top line.

Back then, gross margins were reported at 68.8% and a decade later they were 68.9% – remarkable consistency and evidence of supreme discipline among the management team to not stray far from that benchmark.

As impressive as CEO Satya Nadella has been in growing the top line by 145% over the past decade, he has been even better at growing operating income, which soared from $27.8 billion in 2014 to $88.5 billion in fiscal year 2023, a 218% growth rate.

It’s clear he’s not only growing revenues but doing so more efficiently. And that has investors wondering what the future may hold. Given the past decade has produced massive revenue and profitability growth, what does the next decade hold?

Where Will MSFT Stock Be in 10 Years? 

To get an indication of where Microsoft will be in the future, we took a look at its cash flows. After all, Wall Street values companies based on future cash flow forecasts discounted to the present.

The levered free cash flows at Microsoft are so large that they’re almost hard to wrap your head around. Ten years ago, Microsoft generated levered free cash flows of $27 billion. Five years ago that figure had grown to $38.2 billion and, most recently, it was reported at $59.4 billion.

Those sums are enormous and allow Microsoft to compete with equally well capitalized firms, such as Alphabet, expand its market share in existing markets, and be highly acquisitive, such as by targeting Activision in order to further entrench itself in the gaming market.

Boiling it all down the numbers, we can analyze cash flows and examine Wall Street’s forecasts. According to 49 analysts that cover Microsoft, the consensus estimate is for the share price to rise to a fair value of $389.52 per share.

So, to answer the question where will Microsoft stock be in 10 years? The high likelihood is that Microsoft market capitalization will rise to $3.3 trillion based on a discounted cash flow forecast analysis. That forecast represents the high-end of the analysts’ coverage on Microsoft, and would translate to a share price of $440.

Microsoft Dividend Is Nothing To Sneeze At

If you’re considering buying Microsoft for its upside potential, you’re in good company but some may consider the stock for its dividend income too. After learning that the dividend is 0.81%, many will pass on the opportunity in search for other, higher-paying dividend stocks.

History has shown, however, that some of the smaller paying dividend stocks outperform higher paying dividend stocks when total return is factored in.

It’s easy to get lured into buying a dividend stock that pays out 7-8% or more, but frequently they are value traps because the dividend is not sustainable. For example the payout ratio may be so high that all cash flows are being allocated to pay a dividend out to shareholders.

Microsoft, by contrast, has a payout ratio of 27.36%, meaning that it has ample room to increase its dividend over the coming year without threatening vital cash flows needed to reinvest in its current business or acquire other companies that could cement its market position, expand it, or create new markets.

Wrap-Up

Microsoft has proven itself both as a value and growth firm over the past decade. In 5 of the past 6 years, revenue grew by double digit percentage levels, an enormous achievement from a very high base level.

At present levels, double-digit percentage growth means tens of billions of dollar annually in additional revenues. It’s an astonishing achievement by CEO Satya Nadella and his team to so consistently sustain top line increases.

Over the next decade, investors can be confident that Microsoft will succeed in further growing its top and bottom lines, generating enormous cash flows, and further strengthening its balance sheet, which is fortified at last glance with $34.7 billion in cash and $76.5 billion in short-term investments.

Expect MSFT share price to follow suit as the company’s financial get ever stronger. A $440 price target over the next ten years is absolutely within the realms of possibility.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.