Shares of Microsoft (NASDAQ:MSFT) have been going nowhere over the past few months. MSFT stock still clings to the trillion dollar market cap and is the most highly valued company in the U.S. At some point, though, the MSFT stock price will either push higher or drop lower. Whether it is a break out or break down remains to be seen. My guess is to the upside given the technical and fundamental backdrop.
Microsoft just “announced seven new products” for the Surface suite Wednesday. The star of the show was the Surface Neo, a dual screen laptop that folds like a book. It will take the flagship Surface Pro to a whole new level. It also announced the Surface Duo, a folding phone with a similar design.
The move away from just a Windows based company to a services and hardware company as well bodes well for both the future revenues and margins for Microsoft going forward. And that’s good news for MSFT stock as well.
Microsoft stock is getting more attractive from a fundamental standpoint. Earnings were a huge beat last quarter, coming in at $1.37 versus analyst estimates of just $1.21. Yet Microsoft stock is virtually unchanged since that earnings release. The combination of a big-time beat with no stock reaction serves to make the price-to-earnings ratio decidedly cheaper. Stock in MSFT is a better value now than a few months ago.
MSFT is looking better from a technical take. The MSFT stock price reached oversold readings a few days ago before improving. Its 5-day RSI dipped below 25, then turned higher. The MACD also approached a similar oversold state prior to firming. Bollinger Percent B went negative before strengthening. Shares also held the critical 100-day moving average at $134.90 and bounced.
The previous three instances when these indicators aligned in a similar fashion marked a significant short-term low in Microsoft stock.
MSFT Stock Chart
Microsoft stock has certainly been trading sideways over the past several months. MSFT has been bound to the upside at $140 and by $133 to the downside since mid June. Earnings are due Oct. 23 with expectations for $1.25 in earnings-per-share on a little over $32 billion in revenue. This may finally be the catalyst to break the stock out of the recent consolidation phase.
MSFT stock also pays a decent dividend of 46 cents per quarter and yields just over 1.5% — roughly the same as the 10-year Treasury. The payout ratio is just 78% so the dividend is certainly very safe. Microsoft has a history of raising the dividend, so I would expect that quarterly income to continue to rise. The comparatively attractive yield also serves to buffer any major downside.
Long-term investors seeking income may want to consider a covered call strategy on Microsoft in place of government bonds. Selling a January $140 call would bring in an additional $5.50 per share, effectively increasing the overall yield by 4% (12.50% annualized). The $140 strike also allows nearly 5 points of potential upside appreciation in MSFT stock.
Option players may want to consider a defined risk bull call spread. The Dec $135/$140 call spread is trading around $2.70. Maximum risk on the trade is $270 with a maximum potential gain of $230 if Microsoft stock is above $140 at expiration. Return on risk is 85%.
Tim Biggam may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his strategies can go to https://marketfy.com/item/options-and-volatility.