MSFT tonight – Do you own it? Goose up your chances on the cheap

by Dan April 28, 2011 2:41 pm • Commentary

MSFT reports tonight after the close. Expectations heading into it are low as many analysts have lowered numbers based on weak consumer PC data released by market researchers. INTC‘s commentary throws a bit of a monkey wrench into that weak demand view, as they cited strong enterprise demand and strong demand from emerging markets. Huge headwinds for MSFT right now as they don’t have an operating system for tablets as iOS and Android are on most of the devices being sold right now. The enterprise upgrade cycle should benefit MSFT but will it be enough to make up for PC demand and an absence in the tablet space. MSFT needs to be worried about the cannibalization by tablets on the PC market. A couple of bullet points:

  • MSFT options implying a 4.5% move. Historically their 8 qtr average has been 3.9%
  • Stock is down 5% YTD vs Nasdaq up ~8%
  • MSFT valuation PE around 11 and expected EPS growth in calendar year ’11 and ’12 of 12% and 10% respectively
  • Revenue growth expectations 8% and 7% respectively for ’11 and ’12
  • Analyst community is fairly positive 27 buys 9 holds 1 sell with avg 12m price tgt of 33.5
  • Technically there’s big support at ~25 which the stock recently bounced from
  • Stock is down about 10% from its 2011 high made in January

My View

Don’t expect to see VMW and CTXS style surprises in this. But  SAP‘s disappointment overnight and with expectations so low means that with only an inline qtr and guidance or slightly better, the stock may not go down, and possibly could go up. But what I and many investors would really like to hear is a roadmap for the windows business, specifically how it relates to tablets.

If you happen to be long in MSFT. And have been waiting for signs of life like INTC showed last week (also left for dead until recently) here could be a good way to goose some gains and some catchup with the rest of its tech peers.


-Long MSFT at ~26.58

-Buy 1 May 28 call for .22 and

-Sell 2 of the May 29 calls for a total of .18  (.9 each)

Call Spread costs you .04

Break-Evens on May Expiration:

Downside: If the stock is below 26.62 you suffer loses as you would if you were just long the stock, plus the loss of the .04 in premium that you paid for the call spread.


-Between 26.58 and 28 you make the gains of your long stock.

-Between 28 and 29 you can make up to .96 plus the gains in your stock.

-Best case scenario the stock closes at 29 (up ~9% ) and you would make 2.42 in your stock and .96 in the call spread for 3.38 total (~13% total).

-Stock above 29 on May expiration your long stock is called away up 9% and your call spread expires worth .96, so you have effectively made ~13% in what would be 3 weeks.