Option Trade 
Microsoft Corporation (NASDAQ:MSFT) Calls 
Tuesday, 18th October, 2016

** OPTION TRADE: Buy the MSFT JAN 20 2017 60.000 call at approximately $1.10. Place a pre-determined sell at $2.20.  

Note: No protective stop losses added -- but if you wish to do so make it $0.45.            

by Ian Harvey

October 18, 2016

Microsoft Corporation (NASDAQ:MSFT), the tech titan, will report its fiscal first quarter numbers on October 20. The company will report its quarterly results after the market close, with the consensus calling for earnings of $0.68 per share. During the same period last year the company earned $0.57 per share. Last quarter, the company posted a positive earnings surprise of 18.97%. Over the past four quarters, the company has posted an average positive earnings surprise of 11.49%.

Microsoft got a big boost following its last quarterly report, and if the company is able to post another set of strong numbers there is still more upside for the stock. The stock trades with a trailing P/E of 27.3, but a much lower forward P/E of 17.8. As long as the company is able to hit its earnings estimates the stock should build on its recent gains, and with analysts forecasting earnings growth of 3.6% this year, and a much higher 11.4% next year, there is still upside for the tech leader. The consensus calls for earnings of $0.68, but the street expects a much better quarter, with the whisper calling for $0.72. If Microsoft is able to hit the whisper number, shareholders will likely enjoy a nice jump in shares.

The stock is up a modest 3.9% on the year.

Microsoft Corp. has a 50 day moving average of $57.40 and a 200 day moving average of $54.45. The company has a market cap of $447.45 billion, a PE ratio of 27.34 and a beta of 1.09. Microsoft Corp. has a 1-year low of $47.02 and a 1-year high of $58.70.

Why Microsoft?

Microsoft reported better-than-expected fiscal fourth-quarter results with both the top and the bottom lines exceeding the Consensus Estimate. While increased investment in the cloud impacted margins, forex was surprisingly an offsetting factor.

The company has a hybrid and hyperscale cloud spanning multiple jurisdictions, which makes it ideal for multinational companies and banks that have operations all over the world and are required to be in compliance with laws of the countries in which they operate. This is what Microsoft says has drawn some of the world’s largest banks to Azure.

Microsoft also offers 33K cloud services, which helps it capture big customers like Boeing, Rolls-Royce and Schneider Electric. Another important customer it won in the fourth quarter was Facebook, which currently uses Office 365 for its 13K employees.

For fiscal first-quarter of 2017, Microsoft expects Productivity & Business Process revenues of $6.4-6.6 billion, Intelligent Cloud revenues of $6.1-$6.3 billion and More Personal Computing revenues of around $8.7-9.0 billion. This amounts to total revenue between $21.2 billion and $21.9 billion. Microsoft expects COGS of $7.5-$7.6 billion, opex of $7.35-$7.45 billion and other income/expense of $0.

Management said that 2017 opex will be in a range of $31.1-$31.4 billion as investments in strategic growth opportunities continue. Non GAAP tax rate is expected to be 20% (+/-2%), depending on the variability of factors such as mix of services revenue versus licensing revenues, the geographic mix of revenues and the timing of equity. A higher mix of cloud revenues is also expected to increase the tax rate.

Analyst Input

Microsoft Corp. was upgraded by Zacks Investment Research from a “hold” rating to a “buy” rating in a research note issued last Thursday. The firm currently has a $64.00 price objective on the software giant’s stock. Zacks Investment Research’s price target would suggest a potential upside of 12.06% from the stock’s current price.

According to Zacks, “Microsoft is one of the largest software companies in the world. It is also one of the leading providers of cloud infrastructure and services. The business reorganization and “cloud-first mobile-first” focus are encouraging, but execution and FX risks remain. Additionally, competition is stiff and the company’s dominant position in the PC market continues to be challenged. Meanwhile, estimates have been stable lately ahead of the company's Q1 earnings release. The company has positive record of earnings surprises in recent quarters. Moreover, enterprise strength, the Office 365 subscription model, Azure and promising new products will continue to generate sizeable cash flows with Windows 10 helping maintain consumer share this year and driving enterprise growth in 2016. Additionally, the expansion of Microsoft HoloLens in 6 new markets will improve the company's posiition in the augmented and virtual reality space.”

Also, several other equities research analysts have recently commented on the company.

  • Vetr raised shares of Microsoft Corp. from a “buy” rating to a “strong-buy” rating and set a $57.32 target price for the company in a research note on Tuesday, July 5th.
  •  Wunderlich upped their target price on shares of Microsoft Corp. from $55.00 to $60.00 and gave the stock a “hold” rating in a research note on Wednesday, July 20th.
  •  Sanford C. Bernstein set a $68.00 target price on shares of Microsoft Corp. and gave the stock a “buy” rating in a research note on Monday, June 27th.
  • Nomura reaffirmed a “buy” rating and issued a $65.00 target price on shares of Microsoft Corp. in a research note on Thursday, July 28th.
  •  Finally, Credit Agricole SA reaffirmed an “outperform” rating and issued a $60.00 target price on shares of Microsoft Corp. in a research note on Wednesday, October 5th.

Three equities research analysts have rated the stock with a sell rating, nine have given a hold rating and twenty-one have issued a buy rating to the company’s stock. The stock currently has a consensus rating of “Buy” and a consensus price target of $61.50.

Harvey’s Options Volatility Indicator


Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the MSFT JAN 20 2017 60.000 call at approximately $1.10. Place a pre-determined sell at $2.20. Note: No protective stop losses added -- but if you wish to do so make it $0.45.

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