Clouds And Likes: Microsoft And Facebook On Earnings Docket

Some analysts have referred to Wednesday as “earnings funday” because of the multitude of companies scheduled to report before and after the close. Joining Boeing Co BA and AT&T Inc. T earnings are Microsoft Corporation MSFT and Facebook Inc FB, which report after the close.

Microsoft Earnings and Options Trading Activity

MSFT is ubiquitous in many homes and offices, thanks to its Office suite of home and business software and its Windows operating systems, but the company said it has been forging new ground with its growing cloud-based systems and services. “Cloud as a service has grown by leaps and bounds in the last few years,” according to analysts at Trefis.

Investors might be waiting to see if cloud growth has continued to drive top-line results, according to KeyBanc Capital Markets. In a research report, analyst Brent Bracelin and his team estimated the total addressable public cloud market at about $106 billion, which could triple to $314 billion by 2022, according to MarketWatch. Microsoft has captured some 20% of that market, KeyBanc estimated.

Bracelin also noted that MSFT’s artificial intelligence (AI) is another key part of the company’s strategy.    

At least two other analysts boosted their price targets on MSFT ahead of this week’s earnings. That might have helped the stock push through new highs last week, some analysts said. On Monday, Jan. 22, MSFT shares pushed through a $700 billion market cap, which they had briefly touched on Jan. 17, and shares have stayed above that level ever since. That made it only the third public company—behind Apple (AAPL) and Alphabet (GOOGL)—to break the $700 billion level.

The consensus earnings estimate from third-party Wall Street analysts is $0.86 a share, according to the Earnings Analysis tab on the thinkorswim® platform from TD Ameritrade. A year ago, MSFT earned $0.83 a share, which was higher than analysts’ expectations of $0.79 per share. Revenue is projected to climb to $28.35 billion from $26.07 billion a year ago.

The options market has priced in an expected share price move of 5.2% in either direction around the earnings release, according to the Market Maker Move indicator on the thinkorswim® platform.

Call activity has been higher at the 95 strike while put activity has a smattering of interest spread out across the board. The implied volatility sits at the 100th percentile, its highest volatility level all year. (Please remember past performance is no guarantee of future results.)

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.

FIGURE 1: AMONG THE BIG THREE. Shares of MSFT touched the $700 billion market cap level briefly on Jan. 17, but broke through it in earnest last week (as seen above in oval shadowing), and has remained above it ever since. Chart source:  the thinkorswim® platform by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Facebook Earnings and Options Trading Activity

For FB earnings, it appears that many analysts are most interested in the news feed changes that FB said it is making to its site, as a response to community feedback saying posts from businesses, brands and media are crowding out personal notices. FB said earlier this month that it would change how it feeds news to users.

According to Barclays research, not only is the news feed among the most prominent pieces of FB’s product offering, it generates some 85% of FB revenue. That, several analysts have said, makes the revenue results and forecast from an altered newsfeed a point of interest. Instagram and the WhatsApp app also add significant revenues to FB, according to Trefis.

Chief Executive Mark Zuckerberg addressed that issue in his statement accompanying the announcement of the changes on the blog post Jan. 11: “I want to be clear: By making these changes, I expect the time people spend on Facebook and some measures of engagement will go down,” he wrote. “But I also expect the time you do spend on Facebook will be more valuable. And if we do the right thing, I believe that will be good for our community and our business over the long term, too.”

In the third quarter, FB reported earnings of $1.59 a share, well ahead of the $1.29 a share Wall Street was projecting. Revenues climbed to $10.33 billion, outpacing analysts’ expectations of $9.88 billion.

Revenue for the fourth-quarter is expected to jump to $12.58 billion, more than 42% above the year-ago period of $8.80 billion, according to the consensus earnings estimate from third-party Wall Street analysts, as charted on the Earnings Analysis tab on the thinkorswim® platform from TD Ameritrade. Earnings per share are projected to reach $1.96, ahead of the $1.41 a share FB reported in the year-ago period. Those results also beat Wall Street’s expectations.

The options market has priced in an expected share price move of 5.6% in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform.

Call activity has been higher at the 190 strike while put activity has been concentrated at the 185 strike. The implied volatility sits at the 100th percentile, its highest in 52 weeks. (Please remember past performance is no guarantee of future results.)

FIGURE 2: RELIANCE ON ADVERTISING. Some analysts said they will be listening to what FB has to say about the impact its newsfeed changes might have on advertising revenues. Trefis estimated that core FB advertising generates nearly 70% of FB revenues. Barclays research put the estimate at 85%. Image source: thinkorswim® by TD Ameritrade.  Trefis information and estimates used in Company Profile are provided by Insight Guru, a separate and unaffiliated firm. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Looking Ahead

Earnings are in full swing this week with technology in focus. Apple Inc. AAPL earnings are on the docket for after the bell Thursday. E-commerce juggernauts Amazon.com, Inc. AMZN and Alibaba Group Holding Ltd. BABA also will face off on Thursday. Before all that, however, the latest take on interest rates from the Federal Reserve will be announced Wednesday afternoon.

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