Microsoft Hovers Near Record High as Free Cash Flow Becomes Key

Microsoft is close to hitting a new all-time high, but its stock price may be capped by one key metric: free cash flow. The tech giant's shares are trading at $499.70, just shy of its 52-week high of $549.20. However, the company's rapid capital spending has some investors worried that it will outpace cash generation.

The bull case for Microsoft is strong, with demand for its Azure cloud and commercial services continuing to grow. The company's commercial remaining performance obligations grew 84% to $678 billion in fiscal 2026, while Azure and other cloud services expanded 43% in the fourth quarter. Management has guided to roughly 45% constant-currency Azure growth for the next quarter.

However, Microsoft's capital expenditures have been increasing rapidly, with full-year capex hitting $115.948 billion, up 79.62% year over year. Free cash flow fell to $66.987 billion, down 6.46%, even as operating cash flow grew 34.35%. If free cash flow continues to decline, the market may re-rate Microsoft's stock price.

Microsoft is currently trading at a price-to-free-cash-flow multiple of 55, and investors are waiting for the company's next earnings report to see if it will break through its current rangebound status. The cost of waiting is modest given Microsoft's underperformance versus the S&P 500 over the past year.