Strong cloud business prospects keep Microsoft bullish

On Thursday last week, software giant Microsoft Corp (MSFT) reported its fiscal 2016 third quarter results, which were below the analysts’ estimates. Following the results, on Friday, the shares went into red to close at $51.78. However, many traders believe that a dip in the share price should be used as an opportunity to go long. The major reason for such a view is the optimism shown by the company’s management, as discussed below, about the future of its cloud business.

During the fiscal 2016 third quarter, the company reported a decline in revenue to $20.53 billion from $21.73 billion in the similar period last year. The third-quarter net income was $3.76 billion or $0.47 per share, compared to $4.99 billion or $0.61 per share in the corresponding period of fiscal 2015.

The adjusted third-quarter revenue of $22.08 billion was a notch below the analysts’ estimate of $22.09 billion. Excluding items, the net income for the third quarter was $0.62 per share. The earnings estimate of analysts was $0.64 per share in the third-quarter of fiscal 2016. Microsoft stated that higher tax rate resulted in a decrease in the net income.

The Richmond, Washington based company’s much talked about intelligent cloud computing services’ revenue grew 3% in the third quarter. The analysts were expecting a growth in the range of 7% to 9% for the quarter. The company anticipates the revenue from the cloud business to increase to $20 billion by 2018.

Microsoft Visual Studio

The CEO Satya Nadella stated that Microsoft’s Azure is a hybrid cloud, which allows the clients to run their database internally or transfer to the cloud when the work demands massive processing power. Such a facility is not provided by its competitors, Amazon and Google. Microsoft believes that this unique facility will draw thousands of customers in the future. The CEO’s statement created optimism among the market participants.

The sales of Surface tablet computer increased 56% to $1.1 billion. Furthermore, the advertisement revenue from Bing search engine also grew 55% to $1.5 billion. The company has spent billions of dollars to create Bing, aimed to compete with Google’s search engine. Microsoft is finally able to see the results it wanted.

The company is also offering free excel and word programs for tablets and mobile phones, which runs on operating systems of Google and Apple. By offering free programs, Microsoft aims to cash in when the user begins to access additional facilities such as Skype and cloud file storage. The company is also experiencing rapid subscriber growth for its Office 365 service. Thus, a trader should expect the share price to prop up in the short term.

Technically, the stock has resistance at 55, and support at 48.20. Above $56, the stock can be expected to reach $65 levels. With a reading near 30, the RSI indicator reflects an oversold scenario.

Thus, a binary options trader should purchase a one touch call option contract with expiry in the last week of May. A maximum strike price of $55 is suggested for the one touch call option contract.