Microsoft (MSFT) Implied Straddle Suggest Upside Post Earnings

Market expect Microsoft to report second-quarter earnings per share of $2.78 compared to $2.32 in the prior year.

I think we can look at how Microsoft operating margins have been performing across all business segments over the year quarters.

If we look at the data from FY2018 to FY2022, we can see that there is consistent improvement in operating margins across all business segments. Among these segments, the Productivity and Business Processes division stands out with the highest margin, and its growth remains stable.

We do see the More Personal Computing business experienced a decline since the 2022 fiscal year, which could be attributed to industry cycles and lower market expectations. Its margin improved considerably for fiscal Q1 2024, beating market estimate. But we might see a decline because of lower PC sales demand.

There was a slight decline for MSFT Intelligent Cloud segment margin in fiscal 2022, it has continued to decline in the first three quarters leading up to fiscal 2023. However, in Q4 fiscal year 2023, Intelligent Cloud's margin rebounded, reaching a historic high of 48.4% in fiscal Q1 2024.

This fiscal Q2 2024, we might see an increase because of the improved product competitiveness and bargaining power, also boost from AI, especially MSFT Generative AI. We would need to see if this high level of profitability can be sustained. The reason for the previous decline due to the penetration of the cloud computing industry reaching a certain stage, and intensified competition between companies.

Hope that Microsoft have clear this decrease in pricing power, and would not come and haunt this fiscal Q2 earnings. Something that I think we need to pay close attention is the Copilot add-on, as it has the potential to drive improvements in the average price of Microsoft's Office services.

As Copilot's penetration rate increases, Microsoft's productivity and business processes segment, with flagship product Office 365, has seen another significant increase in margin, reaching a historic high of 53.6% in fiscal Q1 2024.

I foresee that this segment could be the key revenue but we will have to monitor whether this segment can maintain its current level of competitiveness and profitability.

In conclusion, to fully comprehend Microsoft's recent successful transformations, we need to closely monitor changes in revenue and margins for all three business segments. More Personal Computing can be considered as a "cash cow" but it receives low market attention and it might be affected by lower PC sales.

Microsoft’s Intelligent Cloud business might be something to look at in this fiscal quarter, we might not expect much revenue growth, but it should provide some long term so we might want to monitor whether Microsoft can maintain this rebound in revenue growth and profitability in future financial reports.

Next one will be the integration of Copilot, whether the changes in revenue growth can be sustained for upcoming fiscal quarter and future reports.

Technicals are having positive expectations on Microsoft price action, and it has been trading above the 50-day MA period since its last reported earnings.

MSFT last reported earnings on 24 Oct 2023 after the market close (AMC). MSFT shares gained +3.1% the day following the earnings announcement to close at 339.98. Following its earnings release, 97 days ago, MSFT stock has drifted +20.5% higher.

From the time it announced earnings, MSFT traded in a range between 326.28 and 409.98. The last price (409.72) is closer to the higher end of range.

Estimated implied straddle for upcoming earnings is 4.6%. Investors cheered Microsoft's first-quarter results as it beat Wall Street's estimates and promised future product offerings infused with AI.

With this same market sentiment, I would be expecting around 3% positive change to Microsoft share price after its earnings report for fiscal Q2.

The options market overestimated MSFT stocks earnings move 67% of the time in the last 12 quarters. The predicted move after earnings announcement was ±4.8% on average vs an average of the actual earnings moves of 3.7% (in absolute terms).

MSFT's last earnings implied volatility (IV30) going into earnings was 29.8. The last time MSFT released earnings, the implied volatility dropped to 25.3, resulting in an implied vol crush of 15%. 5 days after earnings, the 30 day IV was 21.9. You can compare how MSFT implied volatility changed around earnings for the last 12 quarters.

Average Implied Volatility Crush For MSFT Earnings: 18%

Average 30 Day Implied Volatility 1 Day Before Earnings: 32.2

Average MSFT 30 Day IV for the Day of Earnings: 26.3

Average 30 Day Implied Volatility 5 Days After Earnings: 23.6

Based on what we have seen, Microsoft has gained almost 57% in 2023, and with the renewed enthusiasm for tech stocks that offer exposure to AI. Microsoft looks set to post a better-than-expected earnings report.

With these positive factors, we might be looking to enter Microsoft, but I will monitoring the price actions for a pullback as seen by sequence of higher highs and higher lows punctuated by corrective and orderly pullbacks in Microsoft chart.

Appreciate if you could share your thoughts in the comment section whether you think Microsoft would offer an opportunity to trade for profit after it continue the uptrend with better-than-expected results?

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.