Free Cash Flow Boom Keeps Microsoft Ahead of the Pack

Key Points

• Microsoft reported $25.6 billion in free cash flow, a 10% YOY increase and a record level.
• Cloud and Azure revenue growth highlight Microsoft’s dominant market position.
• Seasonal weakness could pressure MSFT stock, but a move above the 50-day SMA signals upside potential.

Microsoft Corporation (NASDAQ: MSFT) is one of the Magnificent Seven stocks that continues to outperform the NASDAQ in 2025. As of Aug. 27, MSFT stock is up 18.6% in 2025, outpacing the tech index, which has an 11.9% gain.

Microsoft is at the forefront of many of the fastest-growing sectors within the tech space. The company has avenues for generating revenue from cloud computing and artificial intelligence (AI) to cybersecurity and gaming. More importantly, the company can turn that revenue into retained profit in the form of free cash flow (FCF).

In its fourth-quarter earnings report for its 2025 fiscal year, Microsoft reported $25.6 billion in FCF, a 10% year-over-year increase. To give that more perspective, Microsoft’s free cash flow is higher than that of 99.8% of all technology stocks. More than that, the company’s FCF is currently at a record level and 421.9% above its three-year low.

That FCF doesn’t come at the expense of the company’s dividend, which has increased for 23 consecutive years. In fact, including share repurchases and dividends, Microsoft returned $9.4 billion to its shareholders in FY2025.

Strength Across Its Core Businesses

Microsoft has strong positions in hardware, software, and cloud computing and is increasingly becoming the leader in AI. The company’s Office and Azure platforms are an ecosystem unto themselves, allowing the company to deliver scalability along with strong barriers to entry.

The company’s dominant market position was evident in its most recent quarter.

• Full-year Cloud revenue was up 23%, surpassing $168 billion.

• Azure annual revenue was up 34% to $75 billion.

• AI and analytics adoption accelerated despite the fact that Azure AI services remain supply-constrained, with demand exceeding data center capacity.

Investing Heavily in AI

It’s important to note that Microsoft is growing its free cash flow while making massive investments in AI infrastructure. The company announced plans to spend approximately $30 billion in the current quarter.

No full-year guidance was given, but some analysts have the full-year numbers between $100 billion and $110 billion. Those commitments are ongoing and will continue for the foreseeable future.

Microsoft acknowledges that its level of capex spending will eat into its gross margin. However, this is another area where context is important. Microsoft has one of the highest gross margins in the tech sector at 69%. That’s further testament to the recurring nature of its business model.

When to Buy the Dip in MSFT Stock

For all the positive attributes that Microsoft offers investors, the stock is still subject to scrutiny about its valuation. At 36x earnings, MSFT is currently trading at a slight premium to its historical average. At a time when the entire market looks overvalued, investors have been looking to trim their tech exposure, even with high-quality stocks.

That includes MSFT stock, which is down about 1.9% in the last 30 days. That’s not an extreme drop, but it could fall further. September and October are historically weak months for stocks. 

But this is mostly due to fund rebalancing and the beginning of tax-loss harvesting.

Still, the stock could fall to around $490 to $495, which would match an area of support in June. Below that, it could drop to around $465 to $470. The worst-case scenario would appear to be around $440 to $445, which would correspond to the stock's 200-day simple moving average (SMA).