Microsoft May Fall 11% Despite Bullish Profit Forecasts

Microsoft Corp.'s (MSFT) stock has soared  56% over the past year, driven by rising revenue on the explosive growth in its cloud computing unit. It may be time for a breather. Some options traders are betting the shares will pull back by as much as 11% over the next six months. 

Traders' short-term bearish view contrasts with analysts' bullish earnings estimates and price targets. (See: Microsoft Stock May Rise 10% on Strong Cloud Sales.)

MSFT data by YCharts

Several options traders see the software company falling by next year's April 18 expiration date. The bearish puts at the $105 strike saw a surge in open interest rising to over 10,000 contracts, which are bets that the shares will fall. For a buyer of those puts to earn a profit, the stock would need to decline below $101.50. The value of the open puts is around $3.5 million, a sizable bet. 

By contrast, analysts who cover Microsoft see the stock rising more than 8% to $124. They are overwhelmingly bullish, with 91% of the 34 analysts that cover the stock having a buy or outperform rating. There is only one analyst with a sell rating on the stock. 

That optimism stems from their earnings outlook. Analysts see earnings climbing more than 10% in fiscal 2019 on revenue growth of more than 11% to $122.9 billion. Analysts have raised their estimates since July. 

MSFT Annual EPS Estimates data by YCharts

Analysts also see growth continuing in fiscal 2020 as earnings rise by 15% and revenue 10%. (See: Microsoft's Stock May Rise 12% on Raised Forecasts.)

To be sure, technical charts also support the options traders' bearish view. The charts suggest the stock may be losing strength after trending higher in a bullish uptrend since April. The relative strength index (RSI), has been trending lower, despite the stock price continuing to make new highs, a bearish divergence, suggesting the shares will fall. The RSI started trending lower in August after it peaked at an overbought level above 70.

While the fundamentals for the stock look strong, the shares look vulnerable for a pullback over the next few months based on the technical chart and options bets. That pullback may be only short term as long as the company continues to report robust results.

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.