Five of the market-leading “Magnificent 7” stocks are among more than 100 S&P 500 companies reporting earnings this week. We’ll look at an options trade for one of those names near an all-time high that gives investors long exposure to the stock with some insurance, so they don’t feel like they’re just chasing the name. This week’s five reports – Microsoft, Apple, Alphabet, Amazon and Meta – represent more than 23% of the index by market cap. In total, more than 41% of the index by market capitalization will report the most recent quarterly results. The 10 companies below, based on their market caps and implied earnings movements, are likely to have the biggest impact this week. But let’s focus on Microsoft (MSFT). Analyzing MSFT Fundamentals Microsoft is one of the most valuable technology companies in the world. As of this writing, it is the only publicly traded company in the world with a market capitalization greater than $3 trillion, a number so large it’s hard to fathom, but consider this: The company’s market capitalization is 50% greater than that of Saudi Arabia. Arabian Oil Company, aka “ARAMCO” which represents 14% of the world’s oil production. Windows, the company’s most familiar software product, is the dominant operating system (OS) for desktop computers with a market share of more than 70%. While Windows may be the most familiar Microsoft product, it is not their main source of revenue, after cloud services. While Microsoft has continued to experience stellar revenue growth, far exceeding the growth of the economy as a whole, it has seen a slight slowdown in recent years, averaging 7.5% year-over-year over the last 4 reported quarters compared to an average growth rate of 16.4. % compared to the previous 12 reported quarters between 2019 and 2022. Net profit was a bit more consistent, averaging 11% year-over-year growth over the last 4 reported quarters compared to 20.5% in the 3 previous years. This is important because investors are willing to pay a higher multiple for faster-growing companies. MSFT Valuation Earnings that surprise on the upside lead investors to pay a higher amount on a higher number. Over the past five years, Microsoft’s P/E ratio has ranged between 25.8 and 41. Microsoft hit a new high on January 25 and is currently up more than 7.4% for the year. Buying a stock near all-time highs is a little unnerving. A lot of good news is already “embedded” in the share price. What are the future sources of earnings growth? Assuming the company can return to higher revenue growth rates, it also needs to maintain or increase profit margins. On this metric, Microsoft has been fairly consistent over the years, averaging 35%. The 8% headcount reduction the company announced last week in its gaming division was likely necessary as the company eliminated some layoffs after its acquisition of Activision Blizzard was finalized in October last year. Microsoft’s sales are primarily driven by corporate IT spending. If the latest economic data is to be believed, IT infrastructure spending may be higher than many analysts expected. Azure will continue to grow as the cloud computing tailwind continues. The biggest news, of course, is the potential contribution of generative artificial intelligence. Microsoft is, ultimately, a company focused on productivity and business process support, and generative artificial intelligence is likely the next step towards change as the alliance with OpenAI strengthens (recall that OpenAI CEO Sam Altman was fired from the company, but quickly returned largely thanks to the support of Microsoft CEO Satya Nadella). Some are predicting organic sales growth of 15%, double the 7.5% average the company has seen over the last 4 quarters. The trade I get, chasing a stock already up more than 7% for the year, and more than 60% in the last 52 weeks, is unnerving. So consider instead buying a call spread for $12.50 ($1,250 since each contract represents 100 shares), an outlay of 3% per share. The Trade: Bought April $410 Calls Sold April $450 Calls Typically, technical resistance occurs at a prior high, in this case, $407, if we assume we want to participate if it breaks above that level we could buy the calls from the April $410 for $16.50 and sell the April $450 calls for $4 against it, thus spending the $12.50 premium. Right now the options market is implying a move of 4.3% up or down the day after the company reports, the upside breakeven for the call spread is 4.5% above the current stock price, but expires April 19th. 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