Since the stock market correction earlier this year, major indices have battled a slew of headlines centered around the United States’ global tariff wars. This week, we got a quasi-reprieve, so we can trade on company fundamentals as earnings reports trickle out. First up, Microsoft (NASDAQ:MSFT) earnings.
Last night, MSFT reported its quarterly earnings, and it was a good one.
The knee-jerk reaction on Wall Street was to sell the stock, but then they quickly reversed it to green after hours.
The overall yearly growth was an impressive 18%.
Most importantly the right business segments had tremendous growth.
Azure revenue grew by 85%, cloud services by 24%, and added 31 million subscribers to services, including LinkedIn and Office cloud services.
Overall the message is clear: MSFT management is executing on its plans very well.
Microsoft has successfully made the transition into the new world of technology. Satya Nadella & Co. learned their lesson early, especially after the beat-down MSFT stock got from Salesforce.com (NYSE:CRM).
Microsoft’s new leadership is now taking it to the next level, going after Amazon (NASDAQ:AMZN) and its Amazon Web Services (AWS). Compare that to IBM (NYSE:IBM), which also reported this week and still isn’t clear to me that they indeed made the turn.
Fundamentally, Microsoft stock sells at a 30 price-earnings ratio, so it’s not a screaming buy … but it’s not bloated, either. So owning shares, especially at a discount from current levels, won’t be a mistake in the long run. That’s where my opportunity lies.
MSFT is at all-time highs, up 21% year-to-date coming into the earnings. This is half as much as Amazon, but it is almost twice as much as the PowerShares QQQ Trust ETF (NASDAQ:QQQ) and five times better than the SPY.
In other words, this is not an obvious entry point into MSFT stock. With so much risk looming from tariff uncertainty, I’d prefer betting on the proven downside support to hold than on upside hopium.
Microsoft Earnings Trade
Today’s trade will profit even if Microsoft stock will fall another 15%. If the MSFT stock price goes against my trade, worst case is that I own shares cheap and in the long run I am comfortable that would manage out of them for a profit.
We are still in an environment where the bull thesis makes more sense than the bearish one especially if we get past these self-inflicted political hiccups.
Once the headlines abate, investors can go back to trading the fundamentals, which are more bullish and bearish of this point.
The Trade: Sell the MSFT Jan 2019 $90 put and collect $1 per contract to open. I have an 85% theoretical certainty, so that I retain maximum gains. Otherwise, I will accumulate losses below $89.
Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.
The Alternate Trade: Sell the MSFT Jan 2019 $92.5/$90 credit put spread. The spread has the same odds but would deliver 16% yield on risk. Neither trade requires a rally to profit. In fact, Microsoft stock can fall an additional 13% and I could still retain maximum gains.
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Source: Investor Place