- Shares of Microsoft (NASDAQ:MSFT) are looking more attractive on a valuation basis.
- MSFT stock finally found some footing after nearing bear market territory.
- Sell bullish put spreads to take advantage of rich option premiums.
Microsoft reports earnings after the close today. Consensus is for $2.18 earnings per share (EPS) on just over $49 billion in revenue. The whisper number, or what the analysts really think, is for earnings of $2.27 per share. Things look bullish for MSFT stock, and the options market provides a low-risk way to trade it.
What Analysts Are Saying About MSFT Stock
The analysts certainly have a bullish outlook for MSFT stock as well. TipRanks shows that all of the 18 analysts tracking it have buy ratings. The average price target is just over $371, or nearly 34% higher. The lowest price target stands at a rather bullish $330.
InvestorPlace contributor Vandita Jadeja shares a similarly bullish view. She points to the massive opportunity in the gaming segment along with dominant positions in cloud and operating systems as big reasons to buy.
The company has handily beaten estimates over the past three quarters, yet MSFT stock is actually slightly lower in that time frame. This combination of better earnings and a lower stock price makes for a lower multiple.
Its trailing 12-month (TTM) price-to-earnings (P/E) ratio stands just under 30x and is just off the lowest levels in the past year. Other traditional valuation metrics, such as price-to-sales and price-to-book ratios, have softened considerably as well.
Its recent acquisition of Activision Blizzard (NASDAQ:ATVI) will add another revenue stream into the well-diversified mix for Microsoft. This will further bolster the bottom line given that it will be accretive once the deal closes in early 2023.
The Technical Take on MSFT Stock
Shares have fallen nearly 20% since making all-time highs to close out 2021. Its nine-day relative strength index (RSI), moving average convergence divergence (MACD) and Bollinger Percent B all reached oversold readings before strengthening.
MSFT stock is trading at a big discount to the widely followed 20-day moving average at $305. At previous times, all these indicators aligned in a similar manner marked significant short-term lows in Microsoft stock. There is major long-term horizontal support for Microsoft at the $275 level.
Source: The thinkorswim® platform from TD Ameritrade
More importantly, MSFT stock had a key reversal day yesterday. Shares opened lower and near the lows of the day only to pivot and close higher and on the highs of the day. This type of price action is often a sign the previous trend has come to an end.
The sellers have become exhausted and the buyers have taken control. It is more meaningful given it took place at a major inflection point following such a deep and prolonged selloff.
How to Trade It Now
Trading MSFT stock outright can be expensive and somewhat risky. Buying 100 shares at current prices would require nearly $28,000 and subject the buyer to significant potential losses. Luckily, the options market provides a better way to play.
Implied volatility (IV) has risen sharply due to both the impending earnings announcement and the recent sharp selloff in the shares. The options market is implying just more than a 5% earnings-based move in MSFT stock. This is well above the 3.97% average implied move seen over the past eight quarters.
Current IV is now at the 74th percentile. This means option prices are comparatively expensive and favors selling strategies when constructing trades.
So to get paid now to buy MSFT stock later for a lower price, an out-of-the money bull put spread makes probabilistic sense. It is a lower risk and much lower cost way to take a bullish stance on MSFT stock while still providing significant returns.
Sell the MSFT stock June 17 $250/$245 put spread for a $1.00 net credit.
The maximum gain on the trade is the initial premium received of $100 per spread. The maximum risk is $400 per spread. The potential return on risk is 25%.
The short $250 strike price provides an almost 11% downside cushion to the closing price for MSFT stock.
On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.