FT analysis questions the quality of Microsoft’s free cash flow

In short: Investors are looking more closely at Microsoft’s “free cash flow” and some analysts argue a large share comes from financial timing, not day to day profits.

What's going on

Free cash flow is a common way investors judge a company’s financial health. It roughly means the cash a business has left after paying for big investments like buildings and equipment. You can think of it like money left in your bank account after rent and major bills are paid.

The Financial Times Unhedged newsletter says investors have become more sensitive to falling free cash flow at large tech companies that are spending heavily on AI and data centres. It notes Microsoft stands out among big “hyperscalers” because its free cash flow looks stronger than peers, even during a rough month for tech stocks.

The newsletter highlights an argument from analyst Dave Zion of Zion Research Group. He says Microsoft’s reported free cash flow is heavily supported by what he calls financial engineering, meaning choices that shift when cash moves in or out. Examples include paying employees partly in stock instead of cash, leasing data centres instead of buying them, delaying payments for equipment so it shows up as money owed, and classifying some spending in ways that may not look like investment costs.

Zion estimates these factors added up to about $75.3 billion in the last fiscal year, which is more than Microsoft’s reported free cash flow of $67 billion.

What to watch

This does not mean Microsoft is “cheating”, but it may change how investors judge the stability of its cash. Microsoft is also priced more expensively than peers, at about 25 times expected future earnings, so the debate over how durable its cash flow is could matter for its stock price.

Source: Financial Times