The tech giant’s options indicate an expected movement of around 6.6% in either direction after releasing its fourth-quarter results. In contrast, Microsoft’s average implied move has been 4.8% and an actual move of 4.4% over the last twelve earnings cycles, according to data from Option Research & Technology Services (ORATS).
This notably elevated pricing this quarter reflects investors’ perception of Microsoft as a pivotal player in the AI earnings narrative, especially as one of the hyperscalers significantly contributing to this year’s AI-driven market surge.
As the AI market shows signs of slowing, investors who previously invested heavily in tech stocks are becoming cautious of mounting expenses.
Currently, projections indicate that hyperscalers are likely to exceed their combined capital expenditure compared to their free cash flow by 2027, as reported by Reuters last week.
“The market is looking for outcomes,” stated Seth Hickle, chief investment officer at Mindset Wealth Management. “This earnings season centers on effective AI implementation rather than mere enthusiasm for AI.”
Microsoft’s share price has dropped 18.7% this year, while the S&P 500 has risen by 8.52%. Its fiscal third-quarter capital expenditure increased 49% year-over-year to $31.9 billion, a decrease from the previous quarter’s $37.5 billion.
Investors will be attentive to whether Microsoft’s AI investments are fostering enhanced enterprise adoption.
Apart from growth in its Azure cloud computing platform, attention is also on whether clients are adopting Microsoft’s AI tools or seeking alternatives from other providers.
“Investors have observed the AI expenditure. Now they seek tangible outcomes,” remarked Peter Andersen, founder and CEO of Andersen Capital Management. “FOMO ‘Fear of Missing Out’ has transitioned to ‘Fear of Massive Overbuilding.’
INVESTORS STILL BULLISH ON SECTOR
Nonetheless, a significant portion of investors continue to express optimism. One trader invested around $10.4 million on Monday to purchase 20,000 call options linked to Microsoft’s stock pre-earnings, betting on a price increase above $450 by August, according to Chris Murphy, co-head of derivatives strategy at Susquehanna, a market maker. Call options provide the buyer the right to acquire a stock at a predetermined price by a specified date.
“Investors are willing to pay high premiums for option contracts to gain upside exposure,” noted Murphy, despite recent underperformance by Microsoft, which has led to job cuts and a reorganization of its Xbox business.
Additionally, investors have shown bullish sentiment towards the software sector, acquiring 100,000 call options on the iShares Expanded Tech-Software Sector exchange-traded fund in anticipation of Microsoft’s earnings and the Federal Reserve’s meeting, illustrating confidence in both the stock and the broader software industry, as per Murphy.
INVESTORS ALSO WATCHING META’S AI SPENDING
Meta’s options suggest a 7.8% movement after its earnings report on Wednesday, slightly above the 7.3% average forecasted movement from the last twelve earnings cycles, according to ORATS data. Historically, Meta’s stock has exhibited movements that exceed market expectations, averaging 7.9%.
Matt Amberson, founder of ORATS, pointed out that earnings-related volatility has risen over the past year, with notably large responses in the last three quarters.
Investor focus will be on the resilience of Meta’s core advertising business, the influence of AI on engagement and advertising efficiency, and whether the returns from its expanding infrastructure investments can validate its spending levels, stated Matthew Smart, chief investment officer at WWM Investments.
