How to Trade Microsoft's Earnings

Microsoft MSFT is set to report earnings tonight after the bell, and all eyes will be on the tech bellwether from Redmond, Washington. After Intel INTC reported better than expected earnings on Tuesday, many are forecasting this as the potential for strong earnings from Microsoft. Microsoft still gets a majority of its revenues from personal computing, in its Windows division. Analysts are expecting first quarter 2012 earnings of 68 cents per share on $17.25 billion in revenues. In the fourth quarter of 2011, Microsoft reported a profit of 62 cents per share on revenues of $16.2 billion. Since the beginning of the year, shares have lost 3.5% as of the time of this writing, excluding dividend payments. Much has been made of the "death of the PC", with many people talking about smartphones, and tablets replacing laptops and desktops. Intel's quarterly report did not give that a glimpse at all. In fact, it suggested that people are using these devices to supplement PCs, instead of replacing them. This should bode well for Microsoft. Microsoft is set to launch Windows 8 in 2012, which will be it first dual operating system, used for both PCs and tablets. It will be compatible with ARM-based chips ARMH, the first time a Microsoft version of Windows is compatible with ARM chips. Microsoft and Intel were once dubbed "Wintel", as the two companies had a virtual monopoly in personal computing, with Intel supplying the semiconductors, and Microsoft the operating system. As it gets closer to the official launch of Windows 8, there will be an increase on the performance of the new operating system, which may be unlike any other Windows version we have seen previously. It supposedly has a much faster boot time, and a new look to it, as well as an app store. A potential screenshot of the new app store The NASDAQ has been under pressure in the past two days, and Microsoft has one of the largest weightings in the index. Not only will earnings be prescient this quarter, but guidance and any potential talk of a Yahoo YHOO acquisition will be key. There are rumors that Microsoft is considering putting up several billion dollars worth of cash to help take Yahoo private, though Microsoft has denied that in the past. If Microsoft is able to beat and raise guidance, this could boast well for a number of technology stocks, as well as Mr. Softy itself. From Google Finance: Microsoft Corporation is engaged in developing, licensing and supporting a range of software products and services. It also designs and sells hardware, and delivers online advertising to the customers. It has five segments: Windows & Windows Live Division (Windows Division), Server and Tools, Online Services Division (OSD), Microsoft Business Division (MBD), and Entertainment and Devices Division (EDD). ACTION ITEMS:

Bullish:
Traders who believe that Microsoft will beat earnings might want to consider the following trades:

• If the Windows segment proves strong, this could be an additional catalyst for names like Dell DELL, H-P HPQ and Intel INTC.

• If Microsoft talks positively about Windows 8, it could help the ARM-based chipmakers, who might win some computing contracts for chips. Consider names like Texs Instruments TXN and Qualcomm QCOM.

Bearish:
Traders who believe that Microsoft will not beat earnings may consider alternate positions:

• Consider shorting Microsoft, as well as Intel, whose quarter may have been an outlier in tech.
  
  

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