To The Moon

Microsoft’s stock market value ended a trading session higher than Apple’s for the first time since 2021 on Jan 12, making it the world’s most valuable company as worries about demand hit the iPhone maker’s shares.

Apple crept up 0.2 per cent on Jan 12, while Microsoft added 1 per cent. With that, Microsoft’s market capitalisation stood at US$2.887 trillion, its highest ever, according to LSEG data. Apple’s market capitalisation was US$2.875 trillion, calculated with data in a filing on Jan 11.

Source: Tiger Trade App

Worries about smartphone demand have pushed Apple’s shares down 3 per cent so far in 2024 after rallying 48 per cent in 2023. Microsoft is up about 3 per cent year to date after surging 57 per cent in 2023 in a rally driven in part by its lead in generative artificial intelligence through an investment in ChatGPT-maker OpenAI.

Shareholders can gain extra income while they wait for this higher price by selling short put options. This works best with out-of-the-money (OTM) puts in near-term expiry periods.

Why MSFT Stock Is Worth 17% More

Piper Sandler analyst Brent Bracelin notes that momentum is building ahead of the general availability release of GitHub Copilot Enterprise in February. The new enterprise package comes with significant improvements that Bracelin thinks easily validate its $39 per month cost (surpassing the individual pricing of GitHub Copilot at $10 per month and the business version at $19 per month). As of November 2023, the user base for GitHub Copilot has rapidly grown to over 1 million paid developers, and according to the latest data, in a show of strength, December traffic to www.github.com has accelerated on a year-over-year basis for the third month in a row.

On the other hand, Bracelin notes that commentary around M365 Copilot was “surprisingly light,” reinforcing his take that it is still in the early enterprise adoption phase and could take a while to scale.

In fact, considering the big shares price gains of the past year (57% in 2023), while MSFT now sits at the summit of the world’s most valuable companies, and remains Bracelin’s “favorite AI All-Star stock,” the analyst believes it might need “further AI proof-points and/or time to grow into the premium multiple over the next 3-6 months.” “Regardless,” Bracelin summed up, “MSFT has a first-mover advantage in AI that makes this a core growth holding.”

As such, Bracelin reiterated an Overweight rating and $455 price target, implying shares will push 17% higher over the one-year timeframe.

Shorting OTM Puts for Extra Income

Shareholders can wait for this to happen over the next year while getting paid a $3.00 dividend. That works out to a yield of just 0.78%. But in the meantime, they may want to generate extra income. One way to do this is short out-of-the-money (OTM) puts while still owning MSFT stock.

For example, look at the Jan. 26 put option expiration period in two weeks. That coincides with the company's expected press release date of Jan. 25 for Q4 earnings.

It shows that the $375.00 strike price put options trade for $1.32 on the bid side. That means that the short seller of these puts can make 0.352% in immediate yield (i.e., $1.32/$375.00). The strike price offers 3.6% downside protection below Friday's stock price.

$MSFT 20240126 375.0 PUT$

Source: Tiger Trade App

Here is how that works out on a practical basis. The shareholder in MSFT stock must get approval from their brokerage firm to do short put trades. One requirement is to secure the dollar amount needed to buy 100 shares should the stock fall to the strike price.

In this case that means securing $37.500 (i.e., 100 x $375.00 strike price in the put contract). That can be using cash and/or margin (especially since there is margin available from already owning MSFT shares if they are an existing shareholder in MSFT stock).

Next, the investor enters an order to “Sell to Open” 1 put contract at $375.00 for expiration on Jan. 26. The account will then immediately receive $132.00 (i.e. 100 x $1.32). That is why we say that the immediate put yield is 0.352% (i.e., $132 received by selling short/$37,500 invested).

Moreover, if this trade could be repeated every two weeks for a year, the annualized expected return (ER) would be $3168/$37,500 or $8.5%. That is a very high yield in and of itself. 

This shows that investors in MSFT stock can expect to see a much higher price. Shareholders can generate extra income, as high as 8.5% annually, by selling short OTM puts.