Microsoft action appears limited until the acquisition of ATVI

Microsoft Corporation (NASDAQ: MSFT) stocks look likely to stay range-bound for the next quarter or two quarters for a number of reasons, including the pending acquisition of Activision Blizzard Inc. (ATVI). Beyond that is also the case that Microsoft has greatly appreciated over the past couple of years.

The company will now have to fight to recoup the heights it reached before attempting to buy Activision, while facing new scrutiny due to this proposed transaction. The stock valuation is likely to be in a digestion phase now where it will struggle to reach new highs before the resolution of the Activision transaction.

Microsoft recently reported earnings for the second quarter of its fiscal 2022, or holiday quarter of 2021. The company’s results were strong, with revenue of $51.7 billion and diluted earnings per share of 2 $.48 in the quarter. This is an increase of approximately 20% in revenue and 22% in EPS compared to the same quarter a year earlier. Additionally, revenue and EPS were above most estimates.

The numbers were great and stocks rallied in response, but haven’t budged much since then. Additionally, MSFT shares are roughly the same price as they were trading in early January, before the company announced the acquisition of Activision, but after the market began its decline.

This current range appears to be a point of resistance as MSFT stocks appear not to fully participate in the overall market rally underway. It seems likely that MSFT shares will remain in a reasonably tight trading range for some time.

Beyond January’s market weakness and the Activision deal, the chart also shows that Microsoft was already struggling from a November stock high. The shares had an unreal meltdown that took MSFT from around $290 in early October to around $345 in mid-November. A cooling-off period seems reasonable.

Microsoft CEO Satya Nadella also liked this merger and seems to have done a pretty good job of making sales at or near the top.

This range at which the CEO seemed to think it was wise to dump approximately $286 million worth of MSFT stock, and which also ended up being the company’s all-time high, could end up being a serious short-term resistance point.

Risks

Although I think Microsoft is limited, I’m not sure. Also, my level of uncertainty is higher on the downside, i.e. it’s not really clear if $290 would be sustainable support in the face of a broad market sell-off. It looks reasonably decent here though, having taken place in July and October 2021 and January this year. The upside risk if MSFT breaks out of this range is not an issue as I wouldn’t consider shorting it here, but a breakout seems unlikely without a material basis.

Another downside risk is that Microsoft is somehow targeted by a government agency. There already seems to be some level of scrutiny from the FTC, and it’s possible this could become a bigger issue. Given that the market has reacted badly to the proposed acquisition, the risk of the deal should only be so great from here, and it can already be priced into stocks.

Conclusion

I think MSFT will likely remain in a range between its recent lows and the highs it set late last year. That range is reasonably wide, at almost 20% of market valuation, with Microsoft sort of sitting in the middle right now. This may be a good reason to consider selling short-term covered calls against an existing position on any other strength.