Still known for its ubiquitous Windows desktop software, Microsoft Corporation (NASDAQ:MSFT) broke ground in 2016 as the leader in cloud services. Microsoft’s Azure cloud services topped $14 billion in revenue last year, compared to $12.2 billion for Amazon.com, Inc.’s (NASDAQ:AMZN) cloud services.
As a result, Microsoft stock rallied more than 17% in 2016, but this year could be even bigger as the software giant takes aim at artificial intelligence.
The AI move is major for Microsoft, as it is for the company’s partner: Adobe Systems Incorporated (NASDAQ:ADBE). And the breakout for MSFT stock could start soon.
The duo recently announced the integration of Adobe Campaign and Microsoft Dynamics 365, with the result allowing users to assemble data and make business decisions in a way that wasn’t previously possible with each separate platform.
What’s more, you can expect business-centric AI to take off rapidly in 2017, as both salesforce.com, inc. (NYSE:CRM) and Amazon have partnered up to integrate Salesforce’s business AI Einstein with Amazon Connect.
Click to Enlarge With competition heating up on the business AI front, it’s only a matter of time before Wall Street takes notice, and Microsoft stock is positioned to run.
Technically, the shares have recovered nicely after retreating from their late-January highs.
MSFT has since rallied higher along support at its rising 50-day moving average, and Microsoft stock is once again poised to test resistance at $66. A breakout here could mark the start of MSFT’s next upleg in its longer-term rally that began in early 2016.
Sentiment is certainly supportive when it comes to MSFT. According to data from Thomson/First Call, 24 of the 34 brokerage firms following Microsoft stock rate it a “buy” or better, leaving room for potential upgrades as the business AI sector gains steam.
What’s more, there is also room for price-target increases for Microsoft stock. Currently, the 12-month consensus price target rests at $69.42, representing a meager premium of only about 5.4% to Friday’s close. Upgrades or price-target increases could bring additional buyers to the table for Microsoft stock.
Turning to the options pits, Microsoft stock options traders are also adjusting their targets higher for the shares. Currently, the April put/call open interest ratio for MSFT rests at 0.70, down considerably from readings above 1.0 in early March. Furthermore, MSFT is already trading north of peak April call OI of 59,000 contracts at $65, and interest is building at $67.50 as options traders react to the possibility of a MSFT breakout above $66.
Meanwhile, April implieds are currently well below historicals for Microsoft stock, and are pricing in a potential move of only about 1.7% for MSFT ahead of April expiration. In other words, Microsoft options are cheap right now. Currently, the upper bound lies near $66.88, while the lower bound lies at about $64.62.
2 Trades for Microsoft Stock
Call Spread: Traders looking to get in on a breakout above $66 might want to consider an April $66/$67 bull call spread. At last check, this spread was offered at 33 cents, or $33 per pair of contracts. Breakeven lies at $66.33, while a maximum profit of 67 cents, or $67 per pair of contracts, is possible if Microsoft stock closes at or above $67 when these options expire.
Put Sell: While low premiums will cut into your return, traders with a more neutral outlook for MSFT over the short term might want to consider an April $64 put sell. At last check, the $64 put was bid at 16 cents, or $16 per contract.
As long as MSFT stock trades above $64 through April expiration, traders pursuing this strategy will keep the $16 premium. If MSFT trades below $64 ahead of expiration, however, you could be assigned 100 shares for each contract sold at a price of $64 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
