Sunday, April 20, 2014

Microsoft (MSFT) - Earnings Preview: Cash Rich, Dividend Payer, Stock Up 50%... What Now?

MSFT closed Friday trading at $40.01, down 1.0% with IV30™ at 24.0.9%. The Symbol Summary is included below.

Provided by Livevol

This is a pre-earnings note, specifically implied volatility and stock price and is one in a recent series.  To read the other pre-earnings notes you can click on the titles below:

NFLX - Earnings Preview: My Bologna Has a First Name: c.o.m.p.e.t.i.t.i.o.n.; A Reckoning is Coming with Earnings.

ILMN - Volatility Explodes to Multi-year Highs Ahead of Earnings. Skew Reverse; Bends Backwards.

GOOG - Earnings Preview: Highest Risk in Nearly 2-years. A Market Moving Event.

AAPL - An Astounding Pricing by the Market into Earnings. Did You Know This? I Didn't...

Let's turn to MSFT. The Charts Tab (two-years) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Provided by Livevol

On the stock side we can see a remarkable price appreciation in what not too long ago was often referred to as "dead money."  The stock has risen from ~$26 to now over $40 which is a 50+% rise in about a year and a half.  That's not dead money...

So we know where the stock is, but this is a volatility note, so let's turn to the two-year  IV30™ chart in isolation, below.

Provided by Livevol

The blue "E" icons represent the prior earnings dates and we can see that natural rise and fall of volatility around the events.  Overall, the IV30™ in MSFT is in the 60th percentile for the last 52 weeks which feels kind of low given the market situation right now and of course, the earnings event due in three days.

But the chart above is pretty hard to read, so  let's turn to the IV30™ chart with only earnings vol included.
Provided by Livevol

We can see two phenomena, one which seems reasonable, the other which strikes me as quite odd.

1. The implied volatility for the last three earnings cycles for MSFT has risen from what was (in hind sight) the low of the current eight-quarter period.  That seems reasonable.

2. The implied volatility is lower, substantially so, this time around.  That feels... a little weird.  But, I will note that MSFT is not a growth stock, it's actually a boring, dividend paying, cash rich, earnings generator.  You know, one that's up 50% in 18-months.

Let's turn to the Skew Tab.

Provided by Livevol

MSFT shows remarkably 'normal' skew.  Given this skew shape and the level of the implied volatility overall, the option market certainly points to relatively muted risk in this earnings event compared to the recent past.  Fair enough..

To read more about skew, what is and why it exists you can click the title below:
Understanding Option Skew -- What it is and Why it Exists.

Finally, the Options Tab is included below.

Provided by Livevol

As of Friday's close the option market is pricing a stock price range of [$38.50, $41.50] by the end of this week's trading (including earnings).
  • If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.

This is trade analysis, not a recommendation.

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