To The Moon

$Microsoft(MSFT)$ will report its Q2 FY24 earnings after the US markets close on 30 January. Analysts expect Microsoft’s revenues to come in at $61.144 billion. Adjusted earnings are likely to come in at about $2.775 per share, according to Bloomberg's unanimous expectations.

Microsoft's management anticipates Azure's growth to reach 26% to 27% in the second quarter. The company continued its upward trajectory in January 2024, surpassing Apple to become the world's most valuable company with a market capitalization of $3.05 trillion. This reflects investor confidence in the future development of the artificial intelligence field.

Recently, Microsoft announced the launch of Copilot Pro for the M365 Family and Personal edition, priced at $20 per month. This means individual users can now access the latest OpenAI models. Additionally, Copilot for the enterprise has eliminated the minimum purchase requirement for corporate users, indicating potential growth in small and medium-sized enterprise customers.

Shorting OTM Puts for MSFT Stock

In any case, short-put income plays are now very popular for shareholders. This is based on a contrarian reaction to how far the stock has moved up. 

MSFT stock is now over $400 at $409.72. It's already up 8.96% this month alone from $376.04 at the end of December 2023.

But this rise has also pushed its put options premiums higher. 

Traders are expecting a post-earnings release rally in the stock. Whether that happens or not, short sellers can now take advantage of these high premiums. They can sell short out-of-the-money (OTM) puts in nearby expiry periods.

For example, shareholders can enhance this yield by shorting the $380 strike price put expiring on Feb. 16,  (i.e., 3 weeks from now) for $2.08 per contract.

That works out to a yield of 0.55% (i.e., $208 for the $38,000 invested in this play per contract). Moreover, if this trade can be repeated for the next quarter (i.e., 4 times) the investor can make an expected return (ER) of $832 or 2.19% for the 38,000 invested.

That is a very good yield indeed. It helps protect the downside for existing shareholders in MSFT stock. Nevertheless, analysts are still very positive on MSFT stock.

Analysts See Upside in MSFT Despite Its Rise

The company has been infusing AI into its software products with its Copilot technology, and it began making this available to enterprise customers in November. Investors could start getting hints about the financial impacts when Microsoft posts fiscal second-quarter results Tuesday afternoon.

"We continue to expect that Copilot will impact revenue growth in a bigger way in [the second half of the calendar year], but based on our expert discussions, the interest level in Copilot is extremely high and the question is when, not if, adoption will start to ramp in a more material way," Evercore ISI analyst Kirk Materne wrote in a recent note.

Guggenheim analyst John DiFucci added that Wall Street was hoping for "perhaps quantitative" indications on how Microsoft 365 Copilot has been performing. But whether Microsoft's numbers highlight the impact is another story.

Morgan Stanley's Keith Weiss echoed the prediction that generative AI signals would be more qualitative than quantitative, but he doesn't think that approach should warrant frustration.

"We remain convinced investor patience will be rewarded," he wrote.

Citi Research's Tyler Radke is similarly upbeat ahead of the report, agreeing that AI could be a tailwind.

"We expect a solid beat and raise and believe improving IT budgets, partially driven by [generative AI] where MSFT is in a leadership position with multiple monetization vectors can drive a durable multi-year reacceleration in top/bottom line growth," he wrote.

Analysts expect Microsoft to see 10% growth in its productivity and business-processes unit, which includes Office. The More Personal Computing segment, which houses Windows and Xbox, is projected to have increased revenue by 18%.