Michael Kramer and the clients of Mott Capital own MSFT.
Microsoft Corp.’s (MSFT) stock has risen by over 52% in 2019, almost double the pace of the S&P 500, which is up by just over 27%. Even with the big year, some options traders are betting the stock may rise even further to start 2020, climbing to as high at $170.
Microsoft is already off to a strong start in fiscal 2020. The company reported robust growth in its Intelligent Cloud unit in the fiscal first quarter in October, which saw revenue rise by 27%. Its Azure cloud unit led that growth, with revenue jumping a stunning 59%. Additionally, Microsoft’s Productivity and Business Processes unit grew by 13%, led by the social media website LinkedIn, which had revenue growth of 25%.
Year-to-date performance chart
Betting The Shares Continue to Climb
Some investors would think that after such a strong stock performance in 2019, that 2020 would be weaker, with shares giving back some of those significant gains. However, some options traders are betting that the strong stock momentum of 2019 at least carries over into the first month of 2020. The $165 call options that expire on January 17 saw their open interest levels rise by over 12,000 contracts on December 17. There are now almost 30,000 open contracts at that strike price. With the options trading for roughly $0.30 per contract, a buyer of these calls would need the stock to climb to $165.30 to breakeven. That would be a gain of about 6.5% from the current stock price of $155.17 on December 17.
Also, long-shot bets are being placed that the stock rise to over $170. The $170 calls for expiration on the same date, saw their open interest increase by over 13,000 contracts on December 17 to a total open interest of approximately 23,000 contracts. The calls trade for roughly $0.12 per contract. That means the equity would need to rise to around $170.15 for a buyer of the calls to breakeven, a gain of 9.7% from the current stock price.
MSFT Jan 17, 2020 $165 Calls open interest
The Shares May Push Higher Longer-Term
The technical chart does indicate that the shares can rise to the next resistance level at a price of around $158 over the short-term. That level of resistance is a projection of the stock’s move higher from the end of October through the end of November. However, longer-term the stock may be heading to as high as $179 using a projection of the stocks climb higher starting in December 2018 through its July 2019 highs.
MSFT price chart
Strong Growth In Future Years
Analysts are looking for the healthy growth of fiscal 2019 to carry over into 2020. Earnings are estimated to grow by 13.5% to $5.39 per share, while revenue is forecast to rise by 11.5% to $140.3 billion. The good news is that estimates have been on the rise since the middle of July, with earnings estimates rising by 5.6%, and revenue estimates climbing by 1.2%.
Analysts estimates of earnings and revenue
Even better is that the strong growth may continue into fiscal 2021 and 2022. Earnings are forecast to grow by 12.3% and accelerate to 15.8%, respectively. Meanwhile, revenue is projected to grow by 11.3% and speed up to 12.1%, respectively.
While the odds of Microsoft’s stock repeating its 2019 performance seem slim given its massive rise, it doesn’t mean the stock can’t continue to climb. If analysts’ forecasts prove to be correct and the company continues its pattern of topping those forecasts than 2020 may prove to be a strong year for the stock.
Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.
Mott Capital Management, LLC is a registered investment adviser. 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 results.
