Microsoft’s Massive Stock Gains May Be Far From Over

Michael Kramer and the clients of Mott Capital own MSFT.

Microsoft Corp. (MSFT) delivered knock-out fiscal second-quarter results, which easily beat analysts' estimates on both the top and bottom lines. Since reporting results, the shares have jumped nearly 10% and are now up a massive 74% over the past year. Despite the significant gains, options traders are betting the stock rises almost 9% more over the next few months.

The company trounced analysts' earnings estimates by more than 14% coming in at $1.51 per share. Meanwhile, revenue for the company beat estimates by almost 3.5% at $36.91 billion. Investors have the blistering growth of Microsoft’s cloud computing unit Azure and its social media platform LinkedIn, to thank, with each growing at 62% and 24%, respectively.

Betting On A 9% Gain

Open interest levels for June 19, 2020, $195 call options rose by around 18,000 contracts on February 6. The data shows that the calls traded on the ASK for about $5 per contract, an indication the trader bought the options. It is a bet that the stock price rises to $200 or more if holding the contracts until the expiration date. It is a massive wager, with the trader laying out nearly $9 million. Should the stock fail to rise above the strike price by the expiration date, the trader would stand to lose their entire bet. The equity would need to increase by roughly 9% from the share's current price of approximately $183.90 on February 7.

That wasn’t the only big bet,  because the open interest for the $190 calls for expiration on April 17 rose by roughly 17,200 contracts on February 5. These calls also traded on the ASK for a price of about $2.85 per contract. In this case, the stock would need to rise above $192.85 for the trader to earn a profit, if holding the contracts until expiration. The trader laid out a massive amount for this trade too, valued at roughly $4.9 million.

Lifting Estimates

One reason why traders may be so optimistic about Microsoft is that analysts have started to boost their earnings and revenue estimates for the company following the blow-out second quarter. Since reporting results, analysts' consensus estimates for earnings have increased by almost 6% and are now forecast to grow by 20% in fiscal 2020 to $5.70 per share. Meanwhile, revenue estimates have climbed by nearly 2% and are forecast to rise by almost 13.5% to $142.6 billion.

But that’s not all; analysts have also been boosting their full-year fiscal 2021 and 2022 earnings estimates. The better growth outlook is allowing analysts to increase their price targets, with the average target on the stock rising to $197 from around $165.

The Cloud Delivers

Microsoft’s intelligent cloud business unit has continued to deliver healthy revenue growth, rising by almost 27% in the quarter to nearly $11.9 billion from the same period a year ago. Meanwhile, productivity and business processes grew by roughly 17% to $11.8 billion. Finally, more personal computing saw the weakest growth rising by about 1.7% to $13.2 billion.

Overall, the company continues to execute across the board, and if that trend continues, it seems plausible to think Microsoft’s stock still has much further to rise.

Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.

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