Microsoft shares may be gearing up for a bull run in 2020

Michael Kramer and Mott Capital clients own MSFT.

Microsoft Corp stock. (MSFT) rose more than 52% in 2019, nearly double the pace of the S&P 500, which rose just over 27%. Even with the big year, some options traders are betting the stock could still rise to start 2020, hitting $170.

Microsoft has already had a strong start to fiscal 2020. The company saw robust growth in its Intelligent Cloud unit in the fiscal first quarter of October, which saw revenue increase 27%. Its Azure cloud unit led the growth, with revenue jumping 59%. Additionally, Microsoft’s Productivity and Business Processes unit grew 13%, led by social media website LinkedIn, which saw revenue growth of 25%.

Betting that stocks keep going up

Some investors would think that after such a strong stock market performance in 2019, 2020 would be weaker, with equities returning some of those big gains. However, some options traders are betting 2019’s strong equity momentum will continue through at least the first month of 2020. $165 call options that expire on January 17 have seen their open interest levels rise of more than 12,000 contracts on December 17. now close to 30,000 open contracts at this strike price. With options trading at around $0.30 per contract, a buyer of these calls would need the stock to climb to $165.30 to break even. That would represent a gain of about 6.5% from the stock’s current price of $155.17 on Dec. 17.

Also, long-term bets are in the works for the stock to reach above $170. Calls at $170 for expiry on the same date saw their open interest increase by more than 13,000 contracts on December 17 to reach a total open interest of around 23,000 contracts. Calls trade for around $0.12 per contract. This means equity should rise to around $170.15 for a buyer of the breakeven calls, a gain of 9.7% from the current stock price.

Stocks can push higher in the long term

The technical chart indicates that the shares may reach the next resistance level at a price of around $158 in the short term. This resistance level is a projection of the stock’s rise from the end of October to the end of November. However, in the longer term, the stock could reach $179 using a projection of the stock rising from December 2018 to its July 2019 highs.

Strong growth in the years to come

Analysts expect the healthy growth of fiscal 2019 to continue in 2020. Earnings are expected to rise 13.5% to $5.39 per share, while revenue is expected to rise 11.5% to $140.3 billion. The good news is that estimates have been on the rise since mid-July, with earnings estimates up 5.6% and revenue estimates up 1.2%.

Even better, the strong growth could continue in fiscal 2021 and 2022. Earnings are expected to rise 12.3% and accelerate to 15.8%, respectively. Meanwhile, revenue is expected to grow 11.3% and accelerate to 12.1%, respectively.

While the chances of Microsoft stock repeating its 2019 performance seem slim given its massive rise, that doesn’t mean the stock can’t keep climbing. If analyst forecasts turn out to be correct and the company continues its trend of beating those forecasts, 2020 could prove to be a strong year for the stock.

Michael Kramer is a financial market strategist and the portfolio manager of Mott Capital Thematic Growth Portfolio.

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