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Earnings: MSFT Moves Deeper into Cloud Technology

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July 19, 2016
Microsoft earnings report and financial forecasts.

Analysts say Microsoft (MSFT) and Halliburton (HAL), two long-time NYSE stalwarts, might report very different Q2 results this week. MSFT reports after the bell rings Tuesday, and HAL ahead of the open Wednesday.

Mr. Softy’s in the Clouds

Analysts say MSFT might record another drop in sales, which would mark the fifth consecutive year of declining sales. The drop in sales might be one reason the company is gearing up to take a meaningful place in the cloud business. As more companies make their way to the cloud, analysts say MSFT’s Azure might be poised to become a major player.

Analysts point to MSFT’s proposed $26 billion acquisition of LinkedIn (LNKD) and its recent announcement of a strategic partnership with General Electric (GE) as two significant moves in stepping up its cloud business, which grew by 120% in Q1. How did it do in Q2? And when might MSFT close the LNKD acquisition and what are the plans?

Analysts say they also are interested in hearing how Office 365, its subscription business to Office applications and services in the cloud, is faring as it reaches more than 22 million customers. Can recurring subscriptions make up for lost licensing revenues?

Analysts reporting to Thomson Reuters are forecasting a per-share profit of $0.58, compared with $0.62 a year ago. Revenues are seen coming in at $22.14 billion.

Short-term options traders have priced in a potential 5% share price move in either direction around the earnings release, according to the Market Maker MoveTM indicator on the thinkorswim® platform by TD Ameritrade.

Ahead of earnings, options trading was active at the 52-strike puts while calls were trading at the 54.5 strike. The implied volatility is at the 33rd percentile. (Please remember past performance is no guarantee of future results.)

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.

FIGURE 1: FILLING THE GAP.

MSFT shares recently traded up to $54 and into the gap near $56, which was left after last quarter’s earnings report. Chart source: the thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

HAL’s Ties to Oil Prices

As a leader among global oilfield producers, HAL’s operations and results are typically correlated with oil prices. West Texas Intermediate (WTI) crude oil prices tumbled to a 12-year low in mid-February and then rebounded to $50 a barrel, but recently was trading in the $45 range amid mixed sentiment. How can HAL manage through these topsy-turvy times in the crude oil market?

Analysts say they’re also interested in hearing what the fallout is from HAL’s failed attempt to take over Baker Hughes (BHI). While HAL told investors it considered the merger a competitive bid to ward off its biggest rival, Schlumberger (SLB), regulatory officials saw it as limiting competition, considering there are only four major oil-service providers. Combining two would leave only three, which U.S. and European regulatory authorities saw as too confining.

For the quarter, Thomson Reuters analysts are forecasting a per-share loss of $0.19, well below the year-ago profit of $0.44 a share. Revenues are forecast to drop to $3.8 billion from $5.9 billion a year ago.

Short-term options traders have priced that in a potential share-price move of 2.5% in either direction around the earnings release, according to the Market Maker Move indicator.

Options trading has been active at 44-strike puts ahead of earnings results as well as the 46-strike calls. The implied volatility is at the 15th percentile.

FIGURE 2: COILING UP IN A TIGHT RANGE.

Since peaking in early June, HAL shares have held in a tight trading range around $45. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

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