Heading into earnings next week, Microsoft is positioned to continue capitalizing on the growing demand for artificial intelligence and cloud computing services, underscored by the cloud revenue growth reported by Alphabet this week. The company's leading position in the AI and cloud computing makes it a compelling earnings trade for next week. The recent pullback to a major support level and recent outperformance provides an attractive risk/reward opportunity to add bullish exposure before it reports.
MSFT has recently pulled back to a significant support level at $430, which has previously acted as a resistance. This pullback provides a favorable entry point with reduced downside risk after bouncing off that level this week. Microsoft's relative strength to the S & P 500 and momentum are also positive heading into earnings.
From a valuation perspective, MSFT trades at 32x forward earnings, which represents a 50% premium to the average S & P 500 stock. However, this valuation is justified given MSFT's industry-leading margins and expected earnings per share growth of 16% and revenue by 15%, driven by its strong presence in AI and cloud computing. Industry leading net margins of 36% indicate both a highly efficient operation and high profitability on revenues.
The trade To capitalize on the bullish outlook for MSFT ahead of its earnings report, I'm looking to sell the Aug. 30, $445/$425 Put Vertical for a $7.50 credit.
This entails: Selling the August 30 $445 Put at $14.18 Buying the August 30 $425 Put at $6.68 Using a put vertical spread allows us to benefit from the anticipated strength in MSFT while managing risk.
The total potential profit on this trade is $750 per contract if MSFT is above $445 at expiration and a maximum risk is $1,250 per contract if MSFT falls below $425 by expiration. The breakeven price for this trade is $437.50, providing a 1.
6% downside cushion from its current price. DISCLOSURES: Zhang has a long position in MSFT. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium.
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