Event: MSFT reports fiscal Q4 results tonight after the close. The options market is implying about a 5% one day move which is essentially inline with the 4 qtr avg one day move of about the same, but nearly half of the last two quarters post earnings moves of about about 10% each.
Price Action / Technicals: MSFT has traded in a fairly wide range over the last year, between $40 on the downside and $50 on the upside, and remains basically flat on the year at current levels, massively under-performing the Nasdaq Composite which is up 10% on the year:
I suspect the stock sees continued resistance at $50, and healthy support down at $40.
Volatility SnapShot: Implied volatility on a short dated basis has shot up to new 52 week highs at 28.5%, a new 52 week high, above the levels of the last 4 earnings reports.
This is largely result of the fact that the stock has had two back to back 10% moves following the last two earnings reports. Options market makers are a bit spooked to say the least.
Fundamentals: Weak PC sales is a known negative after the results and commentary from AMD, INTC, MU and STX over the last few weeks. But shares of MSFT have hung in there as investors remain focused on tomorrow’s release of Window’s 10, with the hope that it causes an uptick in demand in the back half of the year. Oh, and that little business of the transition towards the cloud based Office 365 with the goal that the model change leads to increased sales per user and assists with cross-selling opportunities in products like cloud storage.
The strength of the dollar will continue to weigh on results as half of their sales come from outside the U.S. Again this is also well known as the company has guided an adverse currency effect for sales in the quarter just completed.
As for guidance, the company hit some potential hot spots in June suggesting that operating expenses in the upcoming fiscal year will be flat, this will be a big focus with the release of Win10 and the current model transition to cloud offerings.
My View: MSFT is not exactly cheap as it once was, trading at 17.5x expected fiscal 2016 earnings growth of 3%, despite the defensive nature of their cash return and balance sheet.
On a near term basis, I suspect the stock finds sellers near $50 as investors will be careful not to get overzealous in front of critical launch of Windows 10, continued customer transition to Office 365, the weakness in their handset business, and the backdrop of a horrid PC market.
Trade: While the implied move looks expensive, options look cheap for those willing to pick a direction. For instance, with the stock at $46.80, the July 24th weekly $46.50 puts are offered at $1.10, with a break-even at $45.40, down 3%. I would also consider extending this view out a few months, looking out to Oct where the 45/40 puts spread is about $1.
Obliviously the flip side is true for the weekly 47 calls, but I am clearly looking for a re-test of the low $40s on weaker than expected full year guidance.