Michael Kramer and the clients of Mott Capital own MSFT.
Microsoft Corp.’s (MSFT) stock has risen by more than 35% in 2019, nearly two times the pace of the S&P 500 which has climbed by just over 19%. It looks as if some traders are betting the stock rises even higher following the company’s fiscal first quarter results on October 23.
The technical chart is also pointing to a stock that is nearing a big break out, which is suggesting the equity can rise by as much as 12%. Should the shares continue to climb, as the charts and the options betting suggests, it will be on the strength of the companies leading platforms: Azure, LinkedIn, and Dynamic 365. Each of these three businesses saw fiscal fourth quarter revenue grow by 25% or more.
The long straddle options strategy, which is the purchase of one put and one call for the same expiration date and strike price, for expiration on November 15 suggests that the stock rises or falls by 5.5% from the $140 strike price. It would place the stock in a trading range of $132.30 to $147.70 by the expiration date. Additionally, the number of calls at that strike price outweighs the puts by a ratio of about 2 to 1, with approximately 31,000 open call contracts to 17,900 open put contracts. It is an indication that there are more bets for the stock to rise than to fall.
But more interesting is the bullish betting that has been piling up over the past few trading sessions. The $142 strike price calls for expiration on October 25 have seen their open interest rise by approximately 5,000 contracts. For the buyer of these calls to earn a profit the stock would need to rise to around $143 by the expiration date, a gain of about 4%.
Additionally, some traders have been active at the $145 strike price for expiration on November 15. The number of open calls for that strike price has risen by about 4,700 contracts. Meanwhile, the $140 puts contracts for the same expiration date show that the open puts increased by about 4,200 open contracts. The data from Trade Alert, shows that this was a spread transaction, meaning the $145 calls were bought, while the $140 puts were sold. It is a bullish bet, one that would suggest the stock price rises above $145 by the expiration date on November 15.
Technical Break Out Nears
The technical chart shows that the stock is approaching a potentially big break out that could send the equity higher by as much as 12%. The shares have been consolidating since July, the last time the company reported results. Should the stock rise above technical resistance at $142 it is likely to climb to around $153 based on the stock’s previous trading patterns, from its current price of $137.41 on October 18.
Strong Earnings and Revenue Growth Expected
Analysts estimate that fiscal first quarter 2020 revenue rose by 10.9% to $32.24 billion. Meanwhile earnings are forecast to have risen by 9.1% to $1.24 per share. Guidance for the fiscal second quarter will be just as important. Consensus estimates see the strong growth trends continuing. Revenue for the second quarter is forecast to rise by 10.7% to $35.95 billion, while earnings are expected to rise by 15.5% to $1.27 per share versus a year ago.
Much of the growth is likely to come from its Azure cloud computing unit. In the fiscal fourth quarter Azure saw its revenue grow by 64% year-over-year. Meanwhile other drivers of growth are likely to come from Dynamic 365 which saw its revenue jumped by 45% in the fourth quarter, and the social media network LinkedIn which had revenue growth of 25%.
If these three business units can bring solid growth, Microsoft is likely to deliver a strong fiscal first quarter and provided strong forward-looking guidance. If that happens it should help to propel the stock higher for the rest of 2019.
Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.
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