(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Microsoft Corp.'s (MSFT) stock has already rallied by nearly 26% in 2018. Now analysts see the stock rising another 12% to $120.25 while upping their earnings outlook for the upcoming fiscal first quarter. The improving sentiment comes on the heels of strong quarterly results on July 19, beating on both the top and bottom lines.
Options traders are also betting Microsoft rises by about 8% by the middle of September. Microsoft is in a race with Apple Inc. (AAPL), Amazon.com Inc. (AMZN) and Alphabet Inc. (GOOGL), to be the first company to reach a $1 trillion market cap. Should the company rise as analysts and options traders expect, its market cap would increase to about $935 billion.
The company reported fiscal fourth-quarter results that beat earnings estimates by about 5%, and revenue estimates by 3%. The healthy beat has caused analysts to lift their earnings estimates for the fiscal first quarter by over 4% but leaving revenue estimates unchanged. However, full-year 2019 revenue estimates have increased by about 1.7% and are forecast to rise to about $122 billion.
The price target on the stock has risen following the results as well, and analysts now see shares climbing to over $120, increasing the price target by about 7 percentage points from $107.75 in the middle of June.
Options traders are bullish, too, and are betting shares will rise by expiration on Sept. 21 by as much as 8% to about $115.70. The $110 strike price options have seen increasing levels of activity, with the open interest rising by nearly 70% since July 20 to 54,000 open calls. Meanwhile, the $115 calls have seen its open interest soar by more than a factor of five since July 20 to nearly 25,000 open contracts.
With the September $115 calls trading at about $0.70 per contract, the price of the stock would need to rise to about $115.70 for the buyer of the calls to break even if holding the options until expiration.
The outlook for Microsoft continues to improve, and shares continue to rise. With strong earnings growth forecasts, Microsoft's earnings multiple for fiscal 2020 slips to just 22 times estimates of $4.90. A healthy valuation for a company expected to see earnings growth of nearly 19%, giving it a PEG ratio of about 1.5.
Should the company continue to deliver impressive results and analysts keep upping their estimates, the stock has likely much higher to climb over the longer term.
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.