(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Options traders are betting that Microsoft Corp. (MSFT) shares will fall by more than 10% by expiration in September. The pessimism comes as analysts have upped their price targets on shares of the software company and ahead of what should be a strong set of quarterly results, after the close of trading on Thursday.
Analysts are looking for earnings to climb in the fiscal third quarter by 16.5% to $0.85 per share, while revenue is seen rising by roughly 9.5% to $25.78 billion. Some 81% of the 36 analysts who cover Microsoft rate shares of the stock a buy or outperform, while the average price target on the stock is almost 14% higher than the stock's price of $93.15 on April 24, at $106. But that optimism is not deterring the bears from betting shares of Microsoft fall first.
There have been some bearish bets placed on Microsoft going into the earnings call. The Sept. 21 $87.5 puts have been seeing increasing levels of buying over the past few days and currently, have an open interest of nearly 10,000 contracts. At a price of roughly $3 per contract, shares of Microsoft would have to fall to $84.50, a drop of about 11%, from its price of approximately $93.15 on April 24, to break even.
Big Price Swing
The long straddle options strategy is pricing in a rise or fall in Microsoft of 8.25%, placing the stock in a trading range of $84.85 to $100.15, from the $92.50 strike price set for expiration on June 15. The put-to-call ratio is about 1 to 1, with nearly 8,400 open call contracts to 7,800, placing the bets on level ground.
Analysts have been very bullish on Microsoft and have been raising their average price target on the stock since Jan. 5 by 13% to $106, up from $93.43. Meanwhile, they have also been upping their earnings estimates for the company since the beginning of the year by nearly 9% to $0.85 from $0.77 per share. Meanwhile, revenue estimates have also climbed since the beginning of the year, more modestly, by only 1% to $25.78 billion from $25.49 billion.
The technical chart for Microsoft also looks weak with a relative strength index that has been trending lower since November 2017 and a stock price close to a technical support region between $91 and $92. Should that level of support break, then the stock could fall to roughly $84.50, a retest of the February lows.
It will be a battle of the bulls and bears when the company reports quarterly results. The question that remains: Who wins?
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.