I’m not buying Microsoft before earnings, but I’m considering running options

Sarge reports long-term and heavyweight Microsoft Market Capitalization (MSFT) on Tuesday evening. The stock, like most of its mega-cap siblings, hasn’t had a good nine months or so. However, it’s hanging out there, trading at 27 times forward earnings, which seems exorbitant in late July 2022 because, after all, that’s Microsoft and Satya Nadella running the place.

Under Satya Nadella’s leadership, Microsoft has run better than ever, regularly beating expectations and increasing both sales and operating income across its three key business segments, Productivity and Business Operations, Intelligent Cloud, and Personal Computing.

This quarter should be tougher. Currency exchange rates were not friendly and costs were rising. Sure, the cloud is still doing well, led by Azure. However, PCs aren’t moving as well as they once were, and the future of capital expenditures at an economically broad level across Microsoft’s customer base, if anything in the future, is now unknown.

Expectations

For Microsoft’s fiscal fourth quarter (June), the consensus is for earnings per share of $2.30 in a range of $2.25 to $2.35. This can be compared to an EPS of $2.17 for the same period last year. These earnings will come on revenue of $52.4 billion in the $51.8 billion to $53 billion range. Microsoft led sales of $46.15 billion for this quarter last year. According to consensus, this quarter will be good for earnings growth of 6% with revenue growth of 13.5%.

As far as Wall Street is concerned, the consensus at $2.30 is the result of a combination of bearish revisions to this number. The overall forecast was $2.35 at the start of the quarter, but it drifted lower as 23 of the 29 analysts I could find had their forecasts lowered by a few pennies a piece.

However, the latest Wall Street signals are generally upbeat. Last Thursday, Wedbush’s Dan Ives maintained the “buy” rating and the $340 price target on Microsoft as Morgan Stanley’s Keith Weiss maintained the “overweight” rating. Weis, who has a target price of $354 per share, believes that the “long-term teen total return profile and attractive valuation” makes the stock a top pick in this environment. last Friday. Queen’s Derek Wood maintained an “Outstanding” rating and a target of $330. Ives, Weiss. Wood all have one thing in common. Not only are they all rated five stars by TipRanks, but they are all ranked in the top 4% of the 8,000 analysts tracked by TipRanks.

What are you looking for

If consumer weakness is a problem, it will appear in the Personal Computing section. The group’s sales grew slower than Microsoft as a whole for the March quarter. Further slowdown, along with currency-related headaches, will put more pressure on production cloud companies, and they may do so.

Additionally, we may hear an update regarding the proposed acquisition of Activision Blizzard ATVI. Moffett Nathanson (3-star) analyst Clay Griffin upgraded (ATVI) to “outperform” Monday (this) morning, noting the gap between the ATVI’s latest sale and Microsoft’s suggested cash-out price of $95 as Griffin sees ” A strong rationale” to start this transaction over.

Beyond that, we need to keep an eye on the basics. Understand that Microsoft is a smooth running machine, producing $2.68 per share for the fiscal third quarter in free cash flow while accumulating a net cash position of $104.66 billion, dwarfing the company’s long-term debt burden of $48.171 billion. Additionally, Microsoft ended the quarter with a current ratio of 1.99, a quick ratio of 1.94 and a tangible book value of $11.25 per share.

My thoughts

Microsoft shed 1.69% last Friday to close up 1.46% over the past week and up 7.8% from its June low. MSFT is down 22.6% year-to-date and 25.5% from its November high. So, the arrow is a dog? It was, but I think we know better than that. At least I hope so. My name is still tall, but it’s a lot shorter than I was earlier in the year, as my core group of majors required some application of risk management on the way down. Should I start buying back the shares I sold? Is it now time to restore MSFT to full exposure?

I really focused more on semiconductors than on software. It worked really well. That group gave a little life to my business. My only remaining software exposure is this stock, some Salesforce (CRM) and some ServiceNow (NOW) that I acquired on a Bill McDermott “Mad Money” slip a few weeks ago. It turned out to be a home race, but it was just a bargain, and I was really starting to lower that position. I need more software for a more balanced portfolio and I trust Nadella probably like any of them.

Interestingly, MSFT rebounded in June on an accurate 50% retracement of the April 2020 rally through November 2021.

Now stock is like standing in the middle of a crowded street wearing the bandeau. The latest MSFT sell-off, the 21-day exponential moving average (EMA), the 50-day simple moving average (SMA) and the upper trendline of our Pitchfork pattern all seem to occupy the same floor. The move higher will almost certainly be technically bolstered, providing support. However, the failure will also be technically enhanced.

my idea (minimum lot)

My thinking is that I might want to consolidate my bullish stance from the dwindling base position from where I stand now. Having said that, I am not brave enough to go out and add equity some day before earnings. I think I will add a bullish buy spread to my underlying share.

Buy $262.50 MSFT July 29 call for $4.90.

Sell ​​(write) the $270 MSFT July call for $2.25.

net discount: $2.65

NB: The trader puts $2.65 in an attempt to get back $7.50. best case? A net profit of 183%. The worst case? The trader loses $2.65.

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