Another Rebound Play Emerges on Strong Earnings, but a Share Drop

Earnings season makes for some rich trades. While many traders expected shares of Microsoft (MSFT) to rally to a $2 trillion valuation after earnings, the company instead surprised with a drop instead.

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  • The company saw revenue up 19 percent compared to a year ago, its highest level. And the company beat analyst expectations. But revenues from the company’s Azure division, where it does its cloud services, seemed a little light to shareholders.

    The end result is that, in spite of great earnings, shares sold off rather than making an anticipated rally.

    However, that does point to some solid profit potential ahead. That’s because Microsoft is still a tech dominator.

    With a number of different divisions, Microsoft has set itself up to profit from nearly any economic condition. In fact, the company reported nearly $3 billion in ad revenue from its LinkedIn division alone!

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  • Action to take: The company is showing strong signs of secular growth, and any pullback can be used as a buying opportunity. Shares under $260 offer investors a nearly 0.9 percent dividend yield, but one with a high growth rate behind it.

    For traders, betting on the longer-term uptrend in shares looks attractive here. The September $275 calls, which were going for about $10.70 before the earnings report and under $10 after, are a buy up to $10. They can likely deliver mid-to-high double-digit returns in a few months, and can be closed out before expiration with a solid profit… possibly just in time for the next quarterly earnings trade.

     

    Disclosure: The author of this article has no positions in the stock mentioned here, but may make a trade on this company after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.

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