“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, June 01, 2020

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy

ALSO

"Trading Capital Management"



Option Trade – Dell Technologies Inc (NYSE: DELL) Calls

Wednesday, June 03, 2020

** OPTION TRADE: Buy DELL OCT 16 2020 55.000 CALLS at approximately $2.50 (Up to $2.80).

Place a pre-determined sell at $5.00.

Also include a protective stop loss of $1.00.

Preamble.....

Shares of Texas-based Dell Technologies Inc (NYSE: DELL) is on the rise. The PC maker announced first-quarter earnings where demand for PCs remains healthy, as COVID-19 has driven many companies to invest in remote working setups.

Revenue in the first quarter was $21.9 billion, crushing the consensus estimate of $20.8 billion in sales. That led to adjusted net income of $1.1 billion, or $1.34 per share, also well ahead of the $1.01 per share in adjusted profits that analysts were expecting. The Client Solutions Group saw sales increase, but the Infrastructure Solutions Group declined as the enterprise shifted spending toward remote work.

"Customers need essential technology now more than ever to put business continuity, remote working and learning plans into practice," COO Jeff Clarke commented in a statement. Dell says it is now the No. 2 commercial PC maker, with market share of 26%.

About Dell Technologies……

Three decades ago, Michael Dell reinvented the way people bought personal computers. By 2000, Dell’s Round Rock–based company was selling more than $35 million of computer equipment a day over the internet. It dominated the tech industry even after its two biggest rivals, Compaq and Hewlett-Packard, merged, in 2002. For most of the nineties, it was the best-performing stock on the Nasdaq exchange.

Seventeen years later, Michael Dell is looking to pull off another transformation: turning his company, which has struggled in recent years, into a fleet-footed organization that’s less focused on hardware than on managing business clients’ data needs.

In 2013 Michael Dell and Silver Lake Partners, a California private equity firm, took the company private in a $25 billion deal and quickly began to reinvent Dell away from the public eye. In 2016 he paid $67 billion for the Massachusetts-based enterprise technology firm EMC—which was almost twice Dell’s size—in the biggest tech acquisition ever. The transaction created what may be the world’s largest company that specializes in selling technology to businesses and then running it for them.

To reflect its new direction, Dell Inc. changed its name to Dell Technologies, which made sense. The old Dell wasn’t really a technology company; it was a manufacturing wonder that spent far less on research and development than most of its rivals. In 2000, for example, its R&D spending was just $482 million, a third of what its biggest competitor, Compaq, spent. The new Dell is all about the tech. Between August and November of last year alone, the company spent more than $1 billion on R&D.

On December 28, 2018, the retooled company, its fortunes looking brighter than many had imagined possible, returned to the public markets, trading under the old DELL symbol on the New York Stock Exchange.

The Pandemic Effect…..

The tech giant said the pandemic has boosted its business in certain sectors. For example, the revenue of Dell's Client Solutions Group rose 2% year over year to $11.1 billion. The segment saw demand for commercial laptop units surge in double-digits whereas mobile workstation saw high-single-digit revenue growth. This is due to orders from banking and financial services, government and health care providers expanding 15% to 20% as these businesses struggled to meet the immediate needs of their customers, communities and patients.

Demand for video collaboration products has surged over the past three months as schools and offices are shut in a bid to prevent the spread of coronavirus. This has seen locked-down staff relying on video conferencing equipment, software and webcams. Dell isn’t the only company to have reported a surge in demand for PCs, notebooks and tablets.

According to latest data, PC sales in the first quarter increased 16% to $2.4 billion compared to the same period a year ago. Storage and data protection software sales grew 12.5%, while security software sales grew 5.3%, representing nearly a quarter of the sales in the software market during this time.

Through its popular Dell Financial Services arm, the company offered new deferred payment schedules and zero up-front costs to help partners preserve capital. Dell Financial Services provided 24-month financing at zero percent interest for servers and select storage products; a six-month term and rotation lease options for select laptops, thin clients and mobile workstations; and three-, six- and potentially nine-month deferrals for customers.

Influencing Factors…..

Besides the worldwide market leader in storage, servers and hyperconverged infrastructure reporting its fiscal first quarter results Thursday night which drove Dell Technologies’ stock up more than 6 percent on Friday – there are several other positive factors.

As many companies are pulling back or pausing their spending on IT hardware in favor or remote working technology, many thought Dell’s overall sales would be hit significantly during the quarter, which ran from February through April – overlapping with when the coronavirus pandemic struck markets globally.

However, Dell beat analysts’ estimates of $0.94 earnings per share (EPS) and Wall Street consensus of $1.01 EPS by reporting profit of $1.34 per share for the quarter.

Dell’s bread and butter infrastructure segments, servers and storage, were hit hard by COVID-19. The company’s server and networking revenues fell 10 percent to $3.76 billion year over year, while Dell dominant storage segment dropped 5 percent to $3.81 billion. Overall, Dell’s Infrastructure Solutions Group revenue declined 8 percent year over year in its first quarter to $7.57 billion.

However, Clarke said Dell’s infrastructure sales drop will not affect its global market share position as it expects to gain share in serves and in specific storage segments.

“We saw demand in large business and in government for our server products, and that demand was all throughout the quarter,” Clarke said. “While down, we saw improved server performance, and expect to gain unit and revenue share for mainstream servers when [IT research firm] IDC x86 server results come out next month. … Though we expect our external storage share to be roughly flat in calendar Q1, we expect share growth in high-end, purpose-built backup appliances and unstructured arrays.”

Dell Technologies owns the majority stake in VMware of approximately 81 percent. The two companies are integrating technologies at a rapid pace and engineers from Dell and VMware are working hand-in-hand on various projects and innovation.

VMware reported first fiscal quarter results on Thursday of $2.73 billion in total revenue, up 12 percent year over year – more than $100 million ahead of Wall Street estimates of $2.62 billion. Additionally, VMware reported profit of $1.52 per share besting consensus estimates by $0.34 cents.

Dell’s Clarke said VMware had a “strong quarter,” highlighting VMware’s operating income of $773 million. “Based on VMware's stand-alone results, subscription and as a service revenue grew 39 percent, with the strongest revenue performance from end user computing, Carbon Black and VeloCloud offerings as well as VMware Cloud on AWS -- which had a triple-digit revenue growth rate,” he said. “Both NSX and vSAN product bookings grew over 20 percent.”

Dell, which has one of the largest IT product portfolios in the world, saw a shift in customer spending away from infrastructure and towards remote-work solutions during the quarter.

Dell’s Client Solutions Group, which includes PCs and notebooks, grew 2 percent year over year to $11.1 billion. The quarterly growth in the segment came thanks to strong sales of commercial client solutions, with revenue rising 4 percent to $8.63 billion. A double-digit revenue increase for commercial notebooks during the quarter was buoyed by 37-percent growth in orders for Latitude notebooks.

“The strong demand for remote work and learning solutions drove the strong commercial client and notebook performance,” said Clarke.

Clarke also said site visits to the company’s website in April skyrocketed 77 percent, “driven largely by interest in remote work offerings and learnings ranging from PC solutions and services, quick-start bundles for VDI and SD-WAN for home access to take the stress off corporate networks.”

Further Earnings Information…..

Although Dell’s revenues fell marginally to $21.90 billion in the fiscal first quarter, the company said that demand for its PCs, notebooks and tablets grew as more people worked and learnt from home. Also sales from its software unit VMware jumped 12% to $2.76 billion.

Commercial notebooks reported double-digit unit and revenue growth, while mobile workstations posted high-single-digit revenue growth, the company said. Dell recently also launched a range of PCs across its popular Latitude and Precision lines aimed at helping employees work efficiently and securely from anywhere.

Moving Forward…..

Dell had previously withdrawn its guidance for this fiscal year due to ongoing macroeconomic risks related to the COVID-19 pandemic. On the conference call with analysts, CFO Tom Sweet offered some commentary around outlook. Revenue in the second quarter is expected to be "seasonally lower than prior years" following strong demand in February and March. That suggests that sales were pulled forward as people transitioned to remote working environments.

Dell is focusing on reducing core debt by $5.5 billion this fiscal year, and warned that macroeconomic weakness may impact IT spending this year.

So…..

Dell achieved a good track record as it surpassed both consensus EPS and revenue estimates three times over the last four quarters.

Overall, despite flat sales and an earnings drop on a year-over-year basis, Dell portrayed a strong financial performance that was well beyond expectations so no wonder its shares went up.


Option Trade – Microsoft Corporation (NASDAQ:MSFT) Calls

Monday, June 01, 2020

** OPTION TRADE: Buy MSFT SEP 18 2020 200.000 CALLS at approximately $4.80 (Up to $5.50).

Place a pre-determined sell at $9.60.

Also include a protective stop loss of $1.95.

Preamble.....

Services-provider company Microsoft Corporation (NASDAQ:MSFT), the tech titan, is carrying the best growth features to consistently beat the market.

Although Microsoft has rallied nearly 50% over the last couple of months, Microsoft stock is likely to climb further in both the short term and long term.

When Microsoft reported earnings in late April, it crushed expectations. Revenue of $35.02 billion grew 14.4% year-over-year and beat estimates by $1.32 billion. Earnings of $1.40 per share topped expectations by 13 cents. More importantly though, the company had one very key sentence in its release:

“COVID-19 had minimal net impact on the total company revenue.”

In the short term, the company’s more heralded catalysts – the growth of its overall cloud business, video games, Teams and the work-from-home trend – will drive the stock higher.

Let’s observe several reasons why Microsoft will continue to do well.....

Good Management - Under Microsoft’s highly successful and innovative CEO,  Satya Nadella, the company is launching new, cloud-based products tailored to the needs of the sectors that are most likely to be successful over the long term.

By tailoring its multiple tools to meet the needs of the world’s strongest sectors, including e-commerce and healthcare, the company will increase its market share in those spaces. And as these sectors grow, Microsoft’s revenue and profits will be meaningfully boosted. Such as.....

  • FedEx Surround - the tech giant, in collaboration with FedEx (NYSE:FDX), has developed FedEx Surround, which enables companies to analyze supply chains.  With the product, FedEx will be able to monitor the location of the products its shipping “and use AI to find new streamlined shipping options.”
  • Cloud for Healthcare - Microsoft has unveiled “Cloud for Healthcare,” which enables collaboration among healthcare providers and advanced data analysis. It also provides tools that “protect health information,” according to the company.

Competition - companies will realize that when they buy Microsoft’s cloud infrastructure, they can also acquire many other highly useful, integrated IT systems that they won’t be able to get from Amazon.

Cloud business and its Teams collaboration product - it appears that the company’s cloud business and its Teams collaboration product have both done well during the pandemic. Specifically, the revenue of its Azure cloud business surged 58% year-over-year in its fiscal third quarter that ended in March, while the number of Teams’ daily active users jumped by 31 million in Q3 versus Q2.

Remote work and learn scenarios - Microsoft reported that “remote work and learn scenarios” had driven “increased cloud usage,” while its sales of Windows licenses also benefited from the work-at-home trend. Among the company’s products that got a boost from more people working at home were Teams and Azure, its main cloud infrastructure offering. The company added that its PC software business, its security offerings and its gaming unit were all lifted by the mass closures around the world.

Earnings Growth…..

Earnings growth is arguably the most important factor, as stocks exhibiting exceptionally surging profit levels tend to attract the attention of most investors. This is often an indication of strong prospects (and stock price gains) for the company under consideration.

Whilst the historical EPS growth rate for Microsoft is 18.7%, but the projected growth of the company's EPS is expected to grow 19.7% this year, crushing the industry average, which calls for EPS growth of -2%.

Cash Flow Growth.....

Cash is the lifeblood of any business, but higher-than-average cash flow growth is more beneficial and important for growth-oriented companies than for mature companies.

Right now, year-over-year cash flow growth for Microsoft is 19.7%, which is higher than many of its peers. In fact, the rate compares to the industry average of 8.8%.

The company's annualized cash flow growth rate has been 12% over the past 3-5 years versus the industry average of 8.7%.

Promising Earnings Estimate…..

The current-year earnings estimates for Microsoft have been revising upward. The Consensus Estimate for the current year has surged 2.4% over the past month.

Financial Situation…..

Microsoft has current assets of $170.5 billion which can easily topple current liabilities of $58.7 billion. Also, MSFT has $137.6 billion in cash and short-term investments.

Not only are current assets about three times the size of its liabilities counterpart, but with almost $140 billion in cash, Microsoft has the ultimate flexibility. It can thrive in either environment because of its enviable cash position.

Moving Forward…..

With the various tools that Microsoft has built or acquired, companies can securely manage and improve their databases.

In the future, the company “will offer enterprise companies a secure private environment to host their code and distribute their software packages.” With data and security becoming paramount to most companies today, there will be huge demand for Microsoft’s products that can enhance databases and protect companies’ information.

Analysts Reactions.....

Zacks Investment Research upgraded shares of Microsoft from a hold rating to a buy rating in a research note issued to investors last Wednesday. Zacks Investment Research currently has $195.00 price target on the software giant’s stock.

According to Zacks, “Microsoft's fiscal third-quarter results benefited from momentum in Azure, impressive Teams user growth led by coronavirus-induced work-from-home wave and uptick in Surface devices. Moreover, the company is benefiting from growing user base of its different applications like Office 365 commercial, and Dynamics. Azure’s expanding customer base remains a key catalyst. Furthermore, it is well poised to expand the total addressable market through acquisitions of GitHub and PlayFab. Notably, shares have outperformed the industry in the past year. However, weak job market and lower spend on advertising due to the coronavirus outbreak are likely to weigh on LinkedIn and Search revenues. Further, delays in consulting business contract renewals and supply chain constraints in China are anticipated to limit growth.”

Also, Microsoft‘s stock had its “buy” rating reaffirmed by stock analysts at Credit Suisse Group in a report issued last Wednesday.

Several other equities analysts have recently commented on the company

  • BMO Capital Markets upped their price objective on shares of Microsoft from $200.00 to $212.00 and gave the stock an outperform rating in a research note on Thursday, April 30th.
  • Royal Bank of Canada lifted their price objective on shares of Microsoft from $196.00 to $200.00 and gave the stock an “outperform” rating in a report last Monday.
  • Macquarie reaffirmed a “buy” rating and set a $200.00 price objective on shares of Microsoft in a report on Thursday, April 30th.
  • Jefferies Financial Group boosted their target price on shares of Microsoft from $175.00 to $200.00 and gave the stock a buy rating in a report on Monday, April 27th.
  • UBS Group boosted their target price on Microsoft from $200.00 to $207.00 and gave the stock a buy rating in a research note on Thursday, April 30th.
  • Citigroup initiated coverage on Microsoft in a research note on Friday, May 15th. They set a hold rating for the company.
  • Finally, Mizuho reissued a buy rating and set a $205.00 target price (up from $200.00) on shares of Microsoft in a research note on Thursday, April 30th.

Two analysts have rated the stock with a hold rating and thirty-six have given a buy rating to the stock. Microsoft currently has a consensus rating of Buy and a consensus price target of $191.55.

So…..

Microsoft is a profit machine with a massive cash balance.

And, Microsoft stock is clearly in buy range.

Microsoft has a 1-year low of $119.01 and a 1-year high of $190.70. The company has a 50-day moving average of $177.59 and a 200 day moving average of $164.47. The firm has a market cap of $1,375.64 billion, a PE ratio of 30.54, and a price-to-earnings-growth ratio of 2.47 and a beta of 0.95. The company has a debt-to-equity ratio of 0.61, a current ratio of 2.90 and a quick ratio of 2.88.