A recent pullback has previously torrid Microsoft (MSFT) stock residing about 9% below its 52-week high. Though that’s close to the 10% needed to fit the strict definition of a correction, the stock’s retrenchment is arguably healthy.
Importantly, Microsoft’s rock-solid fundamental case remains intact. That could signal opportunity with the Direxion Daily MSFT Bull 2X Shares (MSFU) — an ETF designed to deliver 200% of the daily returns of Microsoft shares. Among the reasons MSFU could be appealing over the near-term to aggressive traders is that Microsoft’s aforementioned pullback occurred against the backdrop of impressive fiscal first-quarter results. Those delivered on October 29.
“Microsoft’s first-quarter results easily topped the high end of guidance,” observed Morningstar analyst Dan Romanoff. “Revenue increased 17% year over year in constant currency to $77.7 billion, compared with the high end of guidance of $75.8 billion, while operating margin was 48.9%, compared with the high end of guidance at 47.2%.”
MSFU Could Pack Big Short-Term Punch
The strength of the company’s Azure cloud computing business is integral to the longer-ranging case for Microsoft. Thus, it’s also integral to the short-term case for MSFU. Importantly, both traditional cloud operations and expansion on the artificial intelligence (AI) front support growth in that unit.
“Demand for Azure AI services is surging, which is a long-term positive. While Azure remains capacity-constrained, both traditional and AI workloads were strong. Azure growth was 39% in constant currency for the quarter and surpassed guidance of 37%,” added Romanoff.
In what might surprise some investors, there’s also a valuation case for Microsoft. Agile traders have a similar opportunity with the geared MSFU. Morningstar’s fair value estimate on the stock is $600 — well above the November 10 close at $506.
Add to that, it’s been noted that the S&P 500 Technology Index, of which Microsoft is a member, trades at 42x earnings. That’s below the 67x seen at the height of the 2000 internet bubble. Importantly, megacap tech stocks, including Microsoft, are generating the earnings and cash flow growth needed to support what some say are lofty valuations. At the heart of the matter, Microsoft is a catalyst-rich name over the long-term. That implies there will be ample opportunities to capitalize with MSFU.
“We see results as consistent with our long-term thesis, which centers on the expansion of hybrid cloud environments, the proliferation of AI, and Azure. We center our growth estimates around Azure, Microsoft 365 E5 migration, and traction with the Power Platform,” concluded Romanoff.
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