Longtime Sarge fave and market cap heavyweight Microsoft (MSFT) reported Tuesday night. The stock, like most of its mega-cap brethren, hasn’t had a good nine months or so. However, it remains there, trading at 27x forward earnings, which looks expensive in late July 2022 because, after all, it’s Microsoft and Satya Nadella running the place.
Under Satya Nadella’s leadership, Microsoft has been better than ever, regularly beating expectations and growing both sales and operating income in its three core business segments, namely Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.
This quarter should be harder, though. Currency exchange rates have not been friendly and costs are rising. Sure, the cloud is still doing well, led by Azure. That said, personal computers aren’t moving like they used to and the future of capex on a broad economic scale across Microsoft’s client base, if anything going forward, has become unknown.
Expectations
For Microsoft’s fiscal fourth (June) quarter, the consensus view is for earnings per share of $2.30 within a range of $2.25 to $2.35. This compares to EPS of $2.17 for the prior year. These gains would come from revenue of $52.4 billion within a range of $51.8 billion to $53 billion. Microsoft generated sales of $46.15 billion for this quarter last year. On consensus, this quarter will be good for revenue growth of 6% on revenue growth of 13.5%.
As far as Wall Street is concerned, the $2.30 consensus is partly the result of downward revisions in that number. Cumulative projections were for $2.35 at the start of the quarter but drifted a nickel lower as 23 of the 29 analysts I could find shaved their expectations by a few pennies a piece.
That said, the latest mention made by Wall Street is generally optimistic. Last Thursday, Wedbush’s Dan Ives maintained his “buy” rating and $340 price target on Microsoft while Morgan Stanley’s Keith Weiss maintained his “overweight” rating. Weis, who has a $354 price target on the stock, believes its “young overall return profile over the long term and an attractive valuation” make the stock a top pick in this environment. Last Friday. Cowen’s Derrick Wood maintains an “outperform” rating and $330 target. Ives, Weiss. and Wood all have one thing in common. All of them are not only rated five stars by TipRanks, but all three are rated in the top 4% of the nearly 8,000 analysts tracked by TipRanks.
What to look for
If consumer vulnerability becomes an issue, it will appear in the More Personal Computing segment. The group grew sales more slowly than Microsoft as a whole for the March quarter. A further slowdown, coupled with currency-related headaches, will put more pressure on cloud businesses to produce, and they just might.
In addition, we’ll probably hear an update on the proposed Activision Blizzard ATVI acquisition. Moffett Nathanson analyst Clay Griffin (3 stars) upgraded (ATVI) to “outperform” on Monday (this) morning, citing the gap between ATVI’s last sale and the proposed $95 cash takeout Microsoft’s price as Griffin sees “strong justification” for this deal to go through.
Beyond that, we need to keep an eye on the basics. Understand that Microsoft is a smooth-running machine, generating $2.68 per share for the fiscal third quarter in free cash flow while amassing a net cash position of $104.66 billion, undercutting the company’s long-term debt load of $48.171 billion. Additionally, Microsoft ended that quarter with a current ratio of 1.99, a quick ratio of 1.94 and a tangible book value of $11.25 per share.
My thoughts
Microsoft gave up 1.69% last Friday to close 1.46% for the previous week and rose 7.8% from the June low. MSFT is down 22.6% year to date and is down nearly 25.5% from the November peak. So, the stock is a dog? It happened, but I think we know better than that. At least I hope so. My name is still long, but I have less than the previous year because my core set of disciplines requires me to apply some risk management on the way down. Do I start buying back the shares I sold? Is now the time to return MSFT to full exposure?
I’m actually more focused on semiconductors than I am on software. That worked well. That group breathed some life into my portfolio. My only remaining software exposure is this stock, some Salesforce (CRM) and some ServiceNow (NOW) that I got in the Bill McDermott “Mad Money” gaffe a few weeks ago. That turned out to be a home run, but it was just a trade, and I started drawing that position down. I kinda need more software for a better balanced portfolio and I trust Nadella maybe as much as any of them.
It is worth noting that MSFT in June rebounded to an exact 50% retracement of the April 2020 to November 2021 rally.
Where the stock is today is like standing in the middle of a busy street with a blindfold on. It appears that MSFT’s last selloff, the 21-day exponential moving average (EMA), the 50-day simple moving average (SMA) and the upper trend line of our Pitchfork model are in the same place. A move higher is almost certainly a technical boost, providing support. However, failure can also be strengthened technically.
my idea (minimum lots)
My thinking is that I probably want to strengthen my bullish stance from the narrowed core position from where I am now. That said, I’m not brave enough to go out and add equity the day before earnings. I think I will add a bull call spread to my core equity stake.
– Buy one MSFT $262.50 July 29 call for $4.90.
– Sell (write) an MSFT $270 July call for $2.25.
Net debit: $2.65
Remember: The trader lays down $2.65 in an attempt to win back $7.50. Best case? A 183% net profit. Worst case? The trader lost $2.65.
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