Bull v. Bear: MSFT Trades Down on IBM Preliminary Earnings, CapEx Pressure Lingers

Welcome back to past market here on Schwab Network. Microsoft is trading lower today. It's caught up in the broader selloff across software stocks. The cloud across the space comes after IBM's preliminary earnings disappointed investors and raised concerns about enterprise software spending. Beyond the sector weakness, Microsoft remains in focus after Bloomberg reported recently it's increasingly replacing open AI and anthropic models with its own in-house tech. a move designed to reduce costs and lessen dependence on those third-party models. The company also recently announced thousands of layoffs as it continues shifting resources toward artificial intelligence. Investors will get the next big catalyst when Microsoft reports quarterly results later this month on July 29th with Wall Street looking for continued AIdriven growth. All right, time now for the tugof-war on Microsoft. For that, let's welcome back in our co-host Kevin Hanks and Joe Mola. It is bull versus bear time. Before we get to your example trades, we got to get each of your thoughts on Microsoft. Joe, I'll start with you. Uh when I talk to different uh CIOS um and you know, market strategists, one of the things they feel like about Microsoft is it's one of those ones that got you know, the baby got caught up in the bathwater in the software space. But what's your take? >> I think that they are kind of in that, you know, show me period, right? Show me what you're doing with this AI spend. Uh show me how you're going to monetize it, generate revenue from it. Uh, and I think it's an interesting tact that they're taking, you know, maybe replacing some of the um some of the spend that was allocated towards anthropic and open AI and kind of working on what they're doing with their internally built MAI models. I I think that that's an interesting move and it' be uh, you know, we'll have to wait uh to find a little bit more out on that when we get the earnings call and to kind of get an idea maybe what that spend will look like. But uh you they're they're definitely being kind of punished for you know being part of that that software sector. Stock's down 20% year to date and it's basically down about 33% from its 52- week high of around uh 550 uh you know not that long ago. So, where we're at right now, you know, it could provide a decent uh entry, you know, for investors that that think that, as you mentioned, you know, the baby in the bath water that if that if this thing is overdone and if Microsoft is being unduly punished, uh there's probably a decent entry point. So, you know, I'll kind of leave it at that and get Kevin's thoughts because his or his trades and I are are are they're similar today. So, maybe hear what Kevin has to say. We can kind of go through the trades. Kevin, I'm curious to know your thoughts as well. >> I think the question being asked by investors today on trade desks and hedge funds is, is the IBM problem a software problem or is it just an IBM problem? Cuz software has been heavy. It's been holding and bouncing the last few days. We pointed out on this show the other day, Dian, remember that they were selling memory and buying software. So a lot of these software names had bounced. Not today. Microsoft, Oracle, Salesforce, Adobe, uh, Palunteer looks like it's turning positive, but Service Now, Adobe, they're all red on the day. So software is again getting hit today. But you mentioned, you know, Microsoft just continues to move along their path, bringing more AI in in-house, laying off employees from Xbox, moving assets uh towards AI. They're they're very consistent and they've got remember a portfolio of products. So they're not all uh dependent on AI or or these parts of the US economy that are getting hit. And so a lot I mean I have three price targets that got moved th this week. Argus, Capital, and Wolf Research. All price targets all over $500. And so no one is willing to lower the price targets on on on Microsoft. And so this remember it hit $555, you know, sold off significantly. It looks like it's starting to hold or bounce. Got down to $378 today and it's already rallied off that low. So that's what we're trying to figure out. What is the long-term plan? They've got earnings coming out on July 29th, Joe and Diane. So, I think that's going to be pretty interesting because this stock has been heavy and frankly hasn't bounced significantly off those lows. So, I think we're going to get a lot of information here in a couple weeks. >> That's a good question that you um started with Kevin like is the IBM problem isolated to IBM or is it an industrywide issue? And you know, so you can feel in the market they're trying to kind of sus that out today in the software space even though you know we're seeing largely a downdraft, not as dramatic obviously as IBM. Uh but let's get into uh your example trades. Joe, let's start out with yours. What's your approach today? >> Yeah, so I'm trying to avoid the earnings announcement on the 29th. So this is an expiration on the 27th. It's a weekly option and it's selling a cash secured put to finance buying a vertical call spread. So, it is it is bullish. It's mildly bullish. Uh selling the 375 strike put. Uh you should be able to do this combination of selling the 375 put and then buying the 39045 call spread. You should be able to do that for about even money. Meaning you can sell the put to finance buying that call spread. I think when I was looking at it was even money to a nickel. I think right now you actually put it on for a little bit of a credit. Um we now the stock's been drifting back a little bit. The puts catching a little bit more bid. But the reason I looked at that is there's a couple things. So number one, implied volatility is actually pretty high right now uh in that stock. So the current eyeball rank is around the 90th percentile, meaning that you're you're getting some decent bang for your buck for selling premium. The other thing, Diane, which I thought was interesting, is when you look at um the skew, so basically calls versus puts, the out of the money calls are are are fairly bid right now. There's a lot of buyers of those. So, what you can do by using a a call vertical spread is if you buy something that's at the money, that tends to have a little bit less implied volatility to it on a relative basis to that 10% out of the money with a 5% out of the money call, you know, that you can sell against. So, it actually makes vert vertical spreads a little bit cheaper. So you can buy a cheaper vertical spread, finance it by selling that put. Do it for about even money. Uh and basically it takes your break even down to um your shortput strike, which in this example is 375, and it gives you potential upside up to about 405. So as opposed to just selling the put where all you can make is the credit, you actually have the ability to participate in some upside should the stock rally from here. Yeah. So, when I see Joe's trade, >> it's something we talk about on the show a lot, and that is once you establish your direction, which Joe has in terms of being bullish, he's trying to finance, right, the selling a put, cash secured put to finance his call vertical. Now, it is going to cost him some margin, but there's if you if you're doing it for unchange or a small credit, it's not going to cost you any capital, just margin. And that margin is significant, right? On a $370 stock $385 stock, it's it's significant the the the margin there, but he understands the risk involved. He understands that may may be where he wants to enter the stock anyway. if he does if he does get a move on the downside and of course he stayed ahead of the earnings report. So this is the cash secure put establishing a direction and financing the upside uh call vertical. Now this is turning into a bull bull segment here Diane but I went a little bit differently in that I went right into the earnings event. So, while you have this spread on, this paper money spread, you're going to have the earnings event out. And so, I looked at the earnings event out to the July 31st. Remember, earnings come out uh July 29th. I went to that July 31st expiration expected move around $35. So, I looked at the unbalanced call butterfly that takes advantage of that move. I bought the 385 call and then plus $35 I sold the two of the 420 calls and then I bought one of the 430 call. So a $35 call vertical and a $10 short call vertical. I put that on somewhere around $10. Trading about 20 cents lower than that right now. So trading about $980. But for $10, you can get basically you can buy a $35 call vertical that will pay you exponentially if you're right if it heads towards that uh that $420 strike. However, if it were to go past there, right, on a big event or a rally pre- earnings, uh th this one keeps its profitability above that level because you're long a $35 spread short a $10 spread. And so you you you still have profitability above 420, above 430 and up in in the future. So it's a bull bull. Diane >> Joe, quick thought from you on uh Kevin's example trade here. I will say for both of you guys, I'm not completely surprised to see a bull bull debate here and not because you know I'm starting to hear this view and it's like I don't want to say it's a consensus view but it's been a headscratcher the challenges that have faced uh Microsoft this year especially given how deeply entrenched it is in enterprise at companies and and you know their enterprise needs. But Joe, quick reaction uh to Kevin's example. Trey, >> Kevin, I actually like your trade better than mine. Uh I like the structure of it in that uh you get an opportunity after after a $10 move. You got to pay that you got to pay that debit first, but you get that $10 move and you got a lot more upside than mine does. So, um it's an interesting way to do it. It actually doesn't cost much. Uh you're not paying any any margin on it because you got to pay a debit for so you don't have the margin uh cost as the same trade as mine. Uh, I like it. Uh, if if you think that there's upside up to around that 420, 430 level, could be a good trade.