Online Calculator | A Cheap Strategy To Play Microsoft

A Cheap Strategy To Play Microsoft

Bill Gates is super rich but his once high-flying software business has been inside the doldrums because mid-2002 right after falling from the $35 level. The problem with Microsoft (MSFT) continues to be its failure to grow both its revenues and earnings on the superlative rates the organization as soon as enjoyed.

Any company the size of Microsoft, with a market-cap of $242 billion, will find growth an issue simply because of its size. But this isn’t to say the stock is dead. Far from it, Microsoft remains a viable long-term computer software company and is cash rich with $34 billion or $3.28 per share in cash. This gives the stock lots of monetary flexibility to produce or acquire growth technologies. Microsoft just announced it would spend $1.1 billion in R&D at its MSN Internet unit inside the FY07. And according to the Wall Street Journal, Microsoft is exploring the possibility of taking a stake in Internet media company Yahoo (YHOO) to take on Internet advertising behemoth Google (GOOG)

But with an estimated five-year earnings growth rate of a pitiful 12%, the business has its work cut out for it. Trading at 16.30x its estimated FY07 EPS of $1.44, the stock is not costly but appears being priced not being a growth stock.

Its PEG about the surface of 1.51 isn’t low-cost, but in case you discount within the cash of $3.28 per share, the estimated PEG falls to close to 1,0, a decent valuation. Also, if Microsoft can improve on its estimated 12% growth rate, the PEG would decline further.

The fact is Microsoft in the current price deserves a look. Should you want to play the stock but really don’t want to shell out the $2,347 for a 100-share block, you may want to take a look at the long-term alternatives, also known as LEAPS. For instance, the in-the-money January 2008 $22.50 Microsoft Call LEAPS not set to expire until January 18, 2008 presently costs $380 a contract (100 shares)

This means you risk a total of $380 for the chance to participate in the potential upside of 100 shares of Microsoft over the next 20 months. The breakeven price is $26.30. If Microsoft breaks $26.30, you would begin to make cash in your LEAPS. Conversely, if Microsoft fails to accomplish anything, your maximum risk is $380 on the initial option play.

Warning: The aforementioned example is for illustrative purposes only and not being construed as an actual option strategy. Due for the higher risk inherent in choices, I recommend you speak with an investment professional just before deciding to employ any strategy involving options.

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