Microsoft on the Edge: Bounce Back or Breakdown? Gear Up for Earnings Showdown
Editor’s note: Any and all references to time frames longer than one trading day are for purposes of market context only, and not recommendations of any holding time frame. Daily rebalancing ETFs are not meant to be held unmonitored for long periods. If you don't have the resources, time or inclination to constantly monitor and manage your positions, leveraged and inverse ETFs are not for you.
Investing in the funds involves a high degree of risk. Unlike traditional ETFs, or even other leveraged and/or inverse ETFs, these leveraged and/or inverse single-stock ETFs track the price of a single stock rather than an index, eliminating the benefits of diversification. Leveraged and inverse ETFs pursue daily leveraged investment objectives, which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying stock’s performance over periods longer than one day. They are not suitable for all investors and should be utilized only by investors who understand leverage risk and who actively manage their investments. The Funds will lose money if the underlying stock’s performance is flat, and it is possible that the Bull Fund will lose money even if the underlying stock’s performance increases, and the Bear Fund will lose money even if the underlying stock’s performance decreases, over a period longer than a single day. An investor could lose the full principal value of his or her investment in a single day. Investing in the Funds is not equivalent to investing directly in MSFT.
Microsoft Corporation (Ticker: MSFT) has been a notable laggard as of late. Shares in the tech giant are down over 10% since their peak alongside the broader market in mid-July. Unlike many large caps, MSFT has given back most of its bounce following the early August, Yen carry trade-related swoon that hit risk assets.
It didn’t help matters that the company disappointed investors when previous-quarter earnings were released on July 30. Worse-than-expected results in the Artificial Intelligence (AI)-related businesses caused the stock to plummet, and it’s been a slog ever since. As it stands, MSFT has slightly undercut its 50-day moving average*. Bulls will be keen to see the stock regain this well-followed trend measure in short order.
From a fundamental perspective, Microsoft’s upcoming earnings report later in October may be a chance to undo the damage from the last quarter, and show investors they should get behind the widely-held stock. Another letdown, however, could see the selling pressure increase.
Below is a daily chart of Microsoft, Inc. as of October 2, 2024.
Source: StockCharts.com, October 2, 2024.
Candlestick charts display the high and low (the stick) and the open and close price (the body) of a security for a specific period. If the body is filled, it means the close was lower than the open. If the body is empty, it means the close was higher than the open.
The performance data quoted represents past performance. Past performance does not guarantee future results.
Potential Catalysts That Could Move the Stock
The sluggish performance of MSFT since July could be reversed—or reinforced—depending on how some important catalysts play out.
For example, on September 24, the company announced a $1.3 billion investment in Mexico focused on AI and cloud computing infrastructure. The cloud business represents over 50% of Microsoft’s revenue, so this is spending that could really move the needle in terms of earnings. AI, of course, remains a hot theme among investors. Speaking of AI, Microsoft also participated in the most recent funding round for OpenAI, of ChatGPT fame. This round gives the startup a valuation of $157 billion, and if it keeps climbing, Microsoft shares should benefit.
Antitrust is another potential catalyst, as often seems to be the case with big tech these days. In late September, Alphabet, Inc., parent company of Google, accused Microsoft in a European Union filing of illegally using its dominant position in enterprise software to force customers to use the company’s cloud computing services (Yahoo Finance). If investors begin to believe the complaint has merit, MSFT stock could start to price in possible penalties from the alleged infractions.
Finally, MSFT’s upcoming earnings could provide definitive near-term direction for the name. Microsoft is expected to report their latest earnings on October 30. Traders will also keep an eye on management’s guidance, especially for the cloud and AI business.
Bull or Bear, How Will You Trade It?
Aggressive Microsoft bulls can play any potential gains in the name with the Direxion Daily MSFT Bull 2X Shares (Ticker: MSFU). This leveraged ETF seeks daily investment results, before fees and expenses, of 200% of the performance of Microsoft Corporation common stock. Bears, meanwhile, can bet on further weakness with the Direxion Daily MSFT Bear 1X Shares (Ticker: MSFD). This unleveraged ETF seeks daily investment results, before fees and expenses, of 100% of the inverse (or opposite) of the performance of Microsoft Corporation common stock.
*Definitions and Index Descriptions
An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at www.direxion.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.
The Funds have derived all disclosures contained in this document regarding Microsoft Corporation from publicly available documents. In connection with the offering of each Fund’s securities, neither the Funds, the Trust, nor the Adviser or any of its respective affiliates has participated in the preparation of such documents. Neither the Funds, the Trust nor the Adviser or any of its respective affiliates makes any representation that such publicly available documents or any other publicly available information regarding Microsoft Corporation is accurate or complete. Furthermore, the Funds cannot give any assurance that all events occurring prior to the date hereof (including events that would affect the accuracy or completeness of the publicly available documents described above) that would affect the trading price of Microsoft Corporation have been publicly disclosed. Subsequent disclosure of any such events or the disclosure of or failure to disclose material future events concerning Microsoft Corporation could affect the value of a Fund’s investments with respect to Microsoft Corporation and therefore the value of the Funds.
Direxion Shares Risks - An investment in a Fund involves risk, including the possible loss of principal. Each Fund is non-diversified and includes risks associated with a Fund concentrating its investments in a particular security, industry, sector, or geographic region which can result in increased volatility. A Fund's investments in derivatives such as futures contracts and swaps may pose risks in addition to, and greater than, those associated with directly investing in securities or other investments, including imperfect correlations with underlying investments or the Fund's other portfolio holdings, higher price volatility and lack of availability. As a result, the value of an investment in a Fund may change quickly and without warning.
Leverage Risk – The Bull Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in market conditions that are adverse to its investment objective than a fund that does not utilize leverage. A total loss may occur in a single day. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with MSFT and may increase the volatility of the Bull Fund.
Daily Correlation Risk - A number of factors may affect the Bull Fund’s ability to achieve a high degree of correlation with MSFT and therefore achieve its daily leveraged investment objective. The Bull Fund’s exposure to MSFT is impacted by MSFT’s movement. Because of this, it is unlikely that the Bull Fund will be perfectly exposed to MSFT at the end of each day. The possibility of the Bull Fund being materially over- or under-exposed to MSFT increases on days when MSFT is volatile near the close of the trading day.
Daily Inverse Correlation Risk - A number of factors may affect the Bear Fund’s ability to achieve a high degree of inverse correlation with MSFT and therefore achieve its daily inverse investment objective. The Bear Fund’s exposure to MSFT is impacted by MSFT’s movement. Because of this, it is unlikely that the Bear Fund will be perfectly exposed to MSFT at the end of each day. The possibility of the Bear Fund being materially over- or under-exposed to MSFT increases on days when MSFT is volatile near the close of the trading day.
Microsoft Corporation Investing Risk — Microsoft Corporation faces risks associated with competition in the technology sector and among platform based ecosystems, including its cloud-based services; the evolution of its business, including the development of its new products and acquisitions, joint ventures and strategic alliances; cybersecurity, data privacy and platform abuses; among other risks. Technology Sector Risk — The market prices of technology-related securities tend to exhibit a greater degree of market risk and sharp price fluctuations than other types of securities.
Additional risks of each Fund include Effects of Compounding and Market Volatility Risk, Derivatives Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Industry Concentration Risk, Market Risk, Indirect Investment Risk, and Cash Transaction Risk. Additionally, for the Direxion Daily MSFT Bear 1X Shares, Shorting or Inverse Risk. Please see the summary and full prospectuses for a more complete description of these and other risks of a Fund.