(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Microsoft Corp.'s (MSFT) stock has soared by more than 33% this year, far outpacing the S&P 500, and the stock may keep on rising. Options traders are betting the shares will rise 9% by early next year, with bullish options bets outnumbering bearish ones by a ratio of about 3 to 1.
Analysts also see the shares rising by 9% as earnings growth accelerates over the next the three years. (See: Microsoft Stock May Rise 10% on Strong Cloud Sales.)
Faster Earnings Growth
Analysts forecast not only faster earnings growth, but also bigger profits. Earnings are estimated to grow by more than 10% in fiscal 2019, followed by growth of 15% in 2020 and 18% in 2021. Even more impressive: estimates for fiscal 2019 have increased since the beginning of July by 6% while fiscal 2020 earnings estimates have increased by 5%. (See: Cloud Revenue Jumped 50% In Q2, Microsoft Gains.)
MSFT Annual EPS Estimates data by YCharts
Strong Revenue Growth
Revenue will grow an estimated 10% to 12% per year for the next three years. That is solid growth for a company whose revenue is forecast to rise to $151.6 billion by the year 2021. Since July, revenue estimates for both 2019 and 2020 have increased by almost 2%.
MSFT Annual Revenue Estimates data by YCharts
Upping Price Targets
The robust growth is one reason analysts continue to increase their price targets on the stock. Analysts see the stock rising to almost $123 from the current stock price of around $113.25. That price target has increased by more than 31% since January.
Options traders are bullish too, with the calls outnumbering the puts at the $110 strike price for expiration on January 18 - suggesting the shares will rise. There are almost 42,000 open call contracts at that strike price compared with 14,000 open put contracts. The call contracts have a dollar value of roughly $31 million, a massive wager. Some traders are even betting the stock rises to roughly $122.80 by the middle of January. At the $120 strike price there are almost 21,000 open call contracts, carrying a dollar value of about $6 million, still a large wager.
Microsoft may not put up the kind of massive gains going forward that it enjoyed during the past three years, when it rose more than 150%. But the software giant still appears poised to outperform the market, nonetheless, as long as it keeps meeting or beating Wall Street's estimates.
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.