Don’t Get Too Excited About Microsoft’s 62% Free Cash Flow Growth
Tech software and cloud infrastructure giant Microsoft (NASDAQ: MSFT) reported its fiscal fourth-quarter and full-year earnings last week, and the results exceeded even the market's high expectations. Microsoft is firing on all cylinders across its core enterprise software division and its intelligent cloud division anchored by Azure, and it's putting in solid performance for its "other computing" division across PCs, Surface hardware, and even Bing search.
While analysts and investors like to point to all sorts of multiples to value the company, from PE ratios to EV/EBITDA, and others, the value of any asset is the present value of all future cash flows. And while Microsoft grew non-GAAP (adjusted) revenue by 14%, and both operating income and earnings per share by 24% last quarter, the company's free cash flow surged by a whopping 62%.
However, Microsoft's shareholders shouldn't necessarily plug in that 62% free cash flow growth number into their valuation models. Here's why, and how that number should be understood instead.
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