Loop Capital Boosts Microsoft Price Target to $550

Loop Capital analysts raised Microsoft (NYSE:MSFT) price target to $550 from $500, maintaining a Buy rating, citing confidence in the tech giant’s long-term free cash flow (FCF) growth despite significant near-term investments in generative AI. The revised valuation reflects Microsoft’s unique position in the large-cap software space and its ability to outperform peers over the coming years.

Microsoft’s current valuation is slightly above its large-cap software peers, trading at a 2024/2025 enterprise value-to-free cash flow (EV/FCF) multiple of 45x and 44x, compared to a peer average of 44x and 38x, respectively. While near-term FCF and profit margins are weighed down by heavy capital expenditures for AI initiatives, the analysts argue that these investments are setting the stage for accelerated growth in the medium term.

On a price-to-earnings (P/E) basis, Microsoft trades at 36x and 33x for 2024 and 2025, respectively, below its peer average of 44x and 38x. The analysts noted that these ratios are also affected by restrained margin expansion due to continued investment. Instead, a discounted cash flow (DCF) model provides a more accurate valuation, reflecting the company’s ability to sustain long-term growth despite temporary headwinds.

The DCF model projects Microsoft’s FCF to grow at a compound annual growth rate (CAGR) of 17% through 2028, followed by an acceleration to 30% in 2028 and 40% in 2030 as AI-related investments pay off. Beyond 2030, growth is expected to taper gradually, stabilizing at a terminal rate of 4.5% by 2035.