Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Market Specialist
Summary: Microsoft Inc. (MSFT) earnings exceeded expectations and gained 4% last Friday following the tech giant’s announcement of higher quarterly revenue and profit in its fiscal third quarter. With substantial investments in AI to meet the increasing demand of its AI services, Microsoft seems to be in a strong position for growth. While the long-term fundamentals of the company remain as solid as ever, the larger concerns around rich valuations of Mega-cap tech stocks in US remain a cautionary note for investors particularly with Fed’s higher for longer messaging hanging in the backdrop.
What is happening?
Microsoft reported strong earnings that was driven by its Azure cloud-computing business. The company surpassed estimates with a 17% increase in revenue from the previous year, reaching $61.9 billion, while net income grew by 20% to $21.9 billion as AI strengthened the demand for Microsoft’s software and cloud services. The company has indicated that its capital expenditure will continue to increase after investing $14 billion during the last quarter. Microsoft’s CFO Amy Hood said, “We’re seeing the AI demand continue to grow, and so we’ll continue to work to match that”. Both Microsoft and Alphabet Inc. clearly communicated to investors that their investments in AI and cloud computing are yielding positive results.
As part of its broader strategy to develop AI infrastructure globally, Microsoft has revealed its plans to partner with governments, organizations, and communities to offer AI training to 2.5 million people in Southeast Asia by 2025. Following this, the company has committed to investing $1.7 billion in Indonesia over the next four years to build new cloud and AI infrastructure. The company has also announced a $2.2 billion investment in cloud and AI services in Malaysia, along with the establishment of a data centre in Thailand to boost cloud infrastructure , while providing AI training to more than 100,000 Thais to develop tech. According to CEO Nadella, Microsoft aims to take the lead in the next generation of AI infrastructure that is essential for the future.
What can you do?
For investors holding Microsoft for long-term investment and believe in upside potential of the stock from its AI investments globally but are worried about the rich valuations in the short term, may consider selling covered call options on partial holdings of Microsoft. This strategy enables investors to earn premiums from the call options, providing additional income while they wait for Microsoft’s share price to reach their desired target.
Illustration:
When comparing to options with longer maturity, you can observe how this alters the premium you receive and the distance over which you will be able to set the strike.
Annualised yield of Microsoft options with different Strike and Expiry
Advantages of covered calls
Risks of trading covered calls
Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Capital Markets' Terms of Use, you will find more information on this in the Important Information - Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Capital Markets' website.
This article may or may not have been enriched with the support of advanced AI technology, including OpenAI's ChatGPT and/or other similar platforms. The initial setup, research and final proofing are done by the author.