Microsoft (MSFT) could end up like Apple if its products are a big hit this fall. It is well known that at certain times during the year, Apple's (AAPL) revenue has a lull in anticipation of new product launches, like the iPhone 5 coming out toward the end of the year. If Microsoft emulates success this fall, like Apple does, it will provide investors a good opportunity to find an entry point for buying the stock and also set up a short term income play.
The tech giant appears to be pulling out all the stops on this one. When the Surface Tablet finally comes out, Microsoft is looking for one brand on it this time around and that is its own. Nokia (NOK) which has a tight alliance with the company's mobile phones, has been left out of the tablet market. It might be working on its own with Microsoft but nothing like the Surface. Acer, another ally of Microsoft, has not been silent on its concerns. There is worry that the company will start competing against its partners. Will it be detrimental to the PC industry as a whole? Should its partners, like Acer, keep relying on Microsoft or look for new alternatives? Time will tell.
Even though Microsoft is branding this one itself, it may be the recent pricing that has the most significant impact. If you haven't heard, the Nexus 7 being introduced by Google ( GOOG) was to have a huge impact upon the iPad this year because the software of the Google Nexus 7 which runs Android 4.1 is most similar to the iPad which runs iOS 5 because they both more or less run smartphone OSes. Google will be targeting the market for 7″ tablets and enticed consumers with a significantly lower price point ($199.00) than the iPad. Well, recent sources indicated that there may be a good chance Microsoft's own Surface RT will cost just $199 when it comes out toward the end of October. At that price it will also line up against the Nexus 7 and even the Kindle Fire. It would put Windows 8 on the map in a big way.
If the Surface takes off at this new price, it could send quarterly revenues through the roof for the tech giant. It would emulate Apple's pattern of large revenue intake the last quarter of the year because of new product releases while the third quarter has a lull because costumers are waiting for the new products.
Arguably, the biggest hardware breakthrough of Microsoft's release is the included touch cover keyboard built into its case, helping to bridge the user ability gap between the tablet and laptop. The price line could be a major factor this fall. I have personally gone out and shopped for a new Ultrabook but decided to wait until this fall to see what the Surface looked like to see if I want to buy one. If I am thinking this way, I wonder how many other consumers like me are also thinking like this.
This creates a lull in spending as we wait for the new products. This lowers Microsoft's revenue and also removes any catalyst from influencing any significant moves. This sets up a good point for investors who are interested in owning the stock. Sometime this fall may provide a good entry point if one believes the new products coming out will be a hit. It also lets us set up a short term income play, anticipating no significant movement. The stock is presently consolidating from a bearish trend. The symmetrical triangle that has formed is giving us a hint at possible future direction.
The stock has been consolidating in a symmetrical triangular pattern since early June. As defined at Stockcharts.com:
The symmetrical triangle, which can also be referred to as a coil, usually forms during a trend as a continuation Pattern. The pattern contains at least two lower highs and two higher lows. When these points are connected, the lines converge as they are extended and the symmetrical triangle takes shape. You could also think of it as a contracting wedge, wide at the beginning and narrowing over time.
It appears that if we look at a weekly chart it looks like this pattern is a continuation pattern of a recently started downtrend. So if the pattern follows suit, it should break out on the downside.
The Option Play
The stock is presently trading at 30.17 and if my theory holds true, I expect it to continue moving down when it breaks out of its continuation pattern. If its new products this fall become a hit, I would expect the stock to move up in price significantly come the first quarter of 2013. But until then, as I have written, look for a lull in revenue in anticipation of the new products coming out this fall. So my short term income play will be bearish here.
- Buy a November 2012 put with a strike of '30' (priced at $1.32)
- Sell a November 2012 put with a strike of '29' (priced at $0.89)
- Net Debit to Start: $0.43
- Maximum Profit: $0.57
- Maximum Risk: net debit
- Maximum Length of Play: 3 months
Reasoning behind the Trade
- Microsoft is putting all its eggs into new products for the fall.
- Consumers will wait before buying older products.
- Symmetrical Triangle is a reliable continuation pattern and the stock has been bearish.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.