Heavy Call Buying in Microsoft, is It a Good Stock to Buy?

June 20, 2022 at 06:11 AM EDT

Microsoft Corporation (MSFT) has recently reported solid revenue growth across all its segments for the fiscal third quarter of 2022 and expects the growth to continue in the forthcoming quarters. In addition, given that investors have been stacking up on the stock’s call option over the past week, is it worth adding MSFT to your portfolio now? Let’s find out.

Microsoft Corporation (MSFT) recently shut down its woefully lacking browser, Internet Explorer. The company is now looking forward to the acquisition of Activision Blizzard.

Moreover, it has recently acquired cybersecurity firm Miburo. Miburo specializes in detecting and responding to foreign information operations. With this acquisition, MSFT promises to boost its own cybersecurity research and capabilities.

Also, MSFT intends to use Miburo’s tech to partner with other private and public companies to find ways to stop foreign adversaries from threatening customers. As a result, bulls consider this move a huge boon for MSFT’s future. According to reports, traders had placed more than $600,000 in total premium for the June 17 strike calls at $247.50, $250, and $252.50.

The company posted an EPS of $2.22 for the fiscal third quarter, beating Wall Street expectations by 1.04%. “Continued customer commitment to our cloud platform and strong sales execution drove better than expected commercial bookings growth of 28% and Microsoft Cloud revenue of $23.4 billion, up 32% year over year,” said Amy Hood, executive vice president, and chief financial officer of Microsoft.

Here is what could shape MSFT’s performance in the near term:

Latest Developments

Recently, MSFT announced Microsoft Viva Sales, a new seller experience application. Viva Sales enhances any CRM system with customer engagement data from Microsoft 365 and Microsoft Teams and leverages AI to provide personalized recommendations and insights for sellers to be more connected with their customers.

This helps sellers more seamlessly personalize their customer engagements toward faster deal closure.

This month, The Procter & Gamble Company (PG) and MSFT announced a new multiyear collaboration that will leverage the Microsoft Cloud to help create the future of digital manufacturing at P&G.

The two companies will co-innovate to increase and expand P&G's digital manufacturing platform and leverage the Industrial Internet of Things (IIoT) to bring products to consumers quicker, increase customer satisfaction and enrich productivity to reduce costs.

Also, Accenture (ACN) and MSFT, together with their joint venture Avanade, are joining forces to handle climate change, one of the most critical and urgent challenges for both businesses and people.

With an immediate focus on delivering solutions to help organizations change their operations, products, services, and value chains to help increase the transition to net-zero, the three companies will widen their focus to broader environmental, social, and governance (ESG) challenges in the future.

Robust Financials

During the third quarter ended March 31, 2022, MSFT's total revenue increased 18.4% year-over-year to $49.36 billion. Its operating income grew 19.5% from the year-ago value to $20.36 billion, while its net income improved 8.2% from its prior-year quarter to $16.73 billion. The company's EPS rose 9.4% year-over-year to $2.22.

Strong Profitability

MSFT’s trailing-12-month net income margin of 37.63% is 5.3% higher than the industry average of 604.23%. In addition, its trailing-12-month gross profit margin of 68.73% is 50.5% higher than the 36.02% industry average. Also, its trailing-12-month ROE, ROC, and ROA are 48.72%, 22.43 and 21.03% higher than the respective industry averages.

Impressive Growth Prospects

The Street expects MSFT’s revenues to rise 14% in the current quarter, 18.4% in the current year, and 14.1% next year. The EPS is expected to rise 6.5% In the current quarter, 10.1% in the next quarter, and 15.5% next year.

In addition, MSFT’s EPS is expected to rise at a 16.1% CAGR over the next five years. Furthermore, the company has an impressive earnings surprise history; it topped the Street’s EPS estimates in each of the trailing four quarters.

Consensus Rating and Price Target Indicate Potential Upside

Out of the 25 Wall Street analysts that rated MSFT, 24 rated it Buy, and one rated it Hold. The 12-month median price target of $353.67 indicates a 42.8% potential upside. The price targets range from a low of $298.18 to a high of $411.00.

POWR Ratings Reflect Solid Prospects

MSFT has an overall B grade, which equates to a Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. MSFT has a B grade for Stability and Quality. MSFT’s 0.94 beta is consistent with its Stability grade. In addition, its higher profitability is in sync with the Quality grade.

Among the 56 stocks in the C-rated Software – Business industry, MSFT is ranked #14.

Beyond what I stated above, we have graded MSFT for Growth, Value, and Momentum. Get all MSFT ratings here.

Bottom Line

The company’s robust revenue growth across all segments has raised investor confidence regarding its future performance. In addition, various strategic advancements and collaborations should boost its operational performance.

Given the stock’s higher profitability and solid growth attributes, we think it could be an opportune time for investors to scoop up its shares.

How does Microsoft Corporation (MSFT) Stack Up Against its Peers?

MSFT has an overall POWR Rating of B, which equates to a Buy. Check out these other stocks within the Software – Business industry with A (Strong Buy) ratings: Amdocs Ltd. (DOX), Software AG (STWRY), and Sapiens International Corporation N.V. (SPNS).

MSFT shares were trading at $247.65 per share on Monday morning, up $2.68 (+1.09%). Year-to-date, MSFT has declined -26.04%, versus a -22.73% rise in the benchmark S&P 500 index during the same period.

About the Author: Spandan Khandelwal

Spandan's is a financial journalist and investment analyst focused on the stock market. With her ability to interpret financial data, she aims to help investors evaluate the fundamentals of a company before investing.

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