by Ian Harvey
June 12, 2020
Microsoft In. (MSFT), whose shares are up nearly 20% this year, has been boosted by management’s strong execution and strength in the company’s cloud business. During the pandemic, cloud use has surged.
And, Stock Options Made Easy “Armchair Trader Series” Members were well-positioned to benefit; and made 110% potential profit based on a CALL OPTIONS trade.
Microsoft has been boosted by management’s strong execution and strength in the company’s cloud business, particularly during the pandemic where cloud use has surged.
MSFT shares hit a high of $198.52 on Wednesday, June 10, but lost ground yesterday due to the overall market suffering from COVID-19 fatigue again. The shares closed the day at $186.27, down 5.37% (-$10.57).
Microsoft has reinvented itself over the last decade and is currently one of the most undervalued tech giants in the market. One of the most intriguing reasons why MSFT is undervalued at current prices has to do with its rapidly growing cloud business.
It’s a business that has a reliable management team and is greatly benefitting from current economic conditions. The Microsoft brand is stronger than ever, and the company continues to make exciting moves.
The 45-year-old company is perhaps the best diversified of all the tech giants, with revenue split roughly equally between its three main business segments: productivity and business processes, intelligent cloud, and more personal computing.
In the details outlined for the recommended trade, below, there are several other points that should be pointed out which shows that Microsoft is still ready to rally further. This pull-back has provided an opportunity, for those that missed entering the trade last week, a second chance to profit.
“Armchair Trader Series” Members executed a call options trade on Microsoft on Monday, June 01, 2020, at a cost of $4.80; and the sell value of the option hit $10.10 yesterday – a potential profit of 110%.
The recommended options trade for “Armchair Trader Series” Members.....
** OPTION TRADE: Buy MSFT SEP 18 2020 200.000 CALLS at approximately $4.80.
The Recommended Trade…..
“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.
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 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.
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.”
Microsoft rolled out a cloud service in 2019 called Azure Sentinel which tracks security incidents across a company's computing network and detects threats.
William Blair analyst Jonathan Ho said "Microsoft has become much more competitive in recent years. They've been making improvements in endpoint, in email, mobile device management, and with Azure Sentinel."
To speed up its push into cybersecurity, MSFT has acquired three Israeli startups since 2014 — Aorato, Adallom and Hexadite.
Microsoft is poised to grab market share in the growing field of cybersecurity as companies move more business workloads to their cloud computing services.
MSFT has been aggressive in making acquisitions to become a bigger player in cybersecurity.
Microsoft's Azure cloud computing service and Amazon Web Services — the units housing their cybersecurity businesses — have expanded security offerings via their divergent paths, says William Blair analyst Jonathan Ho.
"Microsoft is building best-of-breed products that will compete with third-party vendors," he said. "Microsoft views security as an area where they want market-leading products."
With its roots in Windows and Office productivity software, Microsoft already has a sizable cybersecurity business. Microsoft bundles some security products with its cloud-based Office 365 productivity tools. In a recent report to clients, Morgan Stanley analyst Keith Weiss estimated Microsoft's 2020 security revenue at $5 billion.
MSFT reportedly is in talks to buy CyberX, a security startup focused on the Internet of Things. These are web-connected digital devices in telemedicine, factories, energy, smart cities and a number of other industries.
The need for cloud computing services has never been greater, which is why some analysts are betting on Microsoft to become the first 2-trillion dollar market capitalization company ever.
One analyst recently referenced the idea of two years’ worth of digital transformation taking place over two months due to the coronavirus outbreak and a fundamental shift toward technologies supporting the work-from-home, and increasingly digital, environment.
Of 23 analysts, 22 have a Buy rating on Microsoft shares.
MSFT bulls view its expansive enterprise tech stack -- which spans productivity suites like Microsoft 365, Azure, server products and more -- as a major structural advantage as it aims for more cloud market share. RBC Capital Markets analyst Alex Zukin, writing on Microsoft's new Cloud for Healthcare offering, noted Microsoft's success in "knocking down traditionally silo’d fiefdoms and going to market with a cohesive, cross-product strategy." Microsoft Cloud for Healthcare is the first of many more specialized clouds, and evidence of the company's strong position in capturing a new wave of demand for cloud services.
MSFT is a market mover and has proven to be one of the best investments an investor could have made in recent years.
Microsoft's outsized returns relative to its peers and the broader stock market can be linked to the acceleration of secular growth trends which have supported the company's business model for decades.
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An Important Note: That any suggestions for options trade considerations require investors/traders to use their own discretion as to when to enter or exit! As well, it is advisable to do further research and due diligence before executing your trade.
It is sometimes best to exit a trade, if there is already sufficient profit accrued, before an earnings report is presented. GREED can be the undoing of a nice profit!