Investors should think of Microsoft as a hot stock trading at impressive multiples.
With Microsoft stock (ticker: MSFT) nearing all-time highs, this argument seems insane. That is not all. Because so many people have loved Microsoft for so long, traders are arguing that it is technically overbought and could fall sharply soon. But that likely doesn’t reflect the impact artificial intelligence could have on Microsoft.
This call for a bullish rating on one of the world’s largest stocks comes as Microsoft CEO Satya Nadella and OpenAI’s upheaval may be leading the way for any company in the world in harnessing the power of AI. This was caused by his actions.
After OpenAI CEO Sam Altman was fired by the board over internal struggles over profits and how the company’s AI power could be used, Nadella offered Altman the job, as well as everyone else at OpenAI. offered to hire.
Altman’s sudden return to OpenAI does not change the established theory. Mr. Nadella’s reaction to Mr. Altman’s initial firing should be seen as a rare insight into a CEO’s strategic thinking.
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This move should encourage investors to ignore Microsoft’s stock’s current valuation and instead embrace thematic analysis, placing more emphasis on the ultimate impact of important trends. Investors following a thematic approach on Amazon.com
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As an example, (AMZN) benefited greatly in the early days of trading.
The market is usually slow to recognize what cannot be expressed in financial models. Amazon was seen as a losing stock for a long time until everyone woke up to the long game.
Unlike high-risk thematic deals that rely on companies solving complex challenges such as major illnesses, Microsoft’s risks are relatively benign. The company is a financial powerhouse that generates so much free cash flow that owning the stock, even if purchased near record highs, adds exposure to AI for free or at a rock-bottom price. There is no doubt about that. Microsoft owns 49% of OpenAI.
Microsoft’s price-to-earnings ratio is about 36 times, valuing it at about twice the corporate value.
S&P500 index
—This means the stock is overvalued by traditional analysis. But its premium valuation is probably justified by the company’s fundamental strengths. Consider: Nvidia
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(NVDA), another AI business, trades at about 120x revenue.
We recently suggested using Microsoft options to profit from year-end stock market gains. The stock price has since skyrocketed, and these trades have yielded dramatic profits in less than a month.
We were going to let the deal expire favorably until the OpenAI drama came along. But Nadella’s move suggests that we don’t fully understand AI because of our aversion to hype and celebratory media coverage.
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Many experts argue that AI has the potential to fundamentally reshape human existence. But we have never seen a shady leader of a major company act so quickly and decisively on news as Mr. Nadella did when Mr. Altman was fired.
Investors who followed our recommendation in early November to sell Microsoft’s January $325 put option for about $9.50 and buy its January $350 call option for about $11.10 should book profits. . The recent put was worth $1.30 and the call was worth $30. If you can hold the stock for 3-5 years, ideally longer, use your profits to build a bigger position in Microsoft.
With Microsoft stock at $373.07, investors can sell the March $350 put for about $9.50 and buy the March $385 call for about $16.50. A risk reversal strategy, i.e., selling a put and buying a call with the same expiration date as the higher strike price, allows investors to buy the stock at a lower price and participate in profits above $385.
The March expiration date gives investors time to rate Microsoft stock bullishly and ponder the ultimate message of Mr. Nadella’s bold move.
Email: editors@barrons.com
