Two giants of the tech world -- Alphabet (GOOG, GOOGL) and Microsoft (MSFT) -- plan to report earnings tonight after the bell. Alphabet will probably hog most of the spotlight, but Microsoft (MSFT) will also get its due.
Both of these tech names are so large that it's difficult to pinpoint exactly what they'll report. Recent first-quarter numbers from Yahoo! (YHOO) hint that Alphabet should do fairly well, although GOOGL has so many more pieces than YHOO does that we can't make any one-to-one comparisons.
As for Microsoft, its shift to a subscription model for Office looks like a solid winner to my eyes, but will it be enough to overcome the current, fairly benign PC market?
I happen to think so, but the stock already appears priced for perfection. Even though Microsoft shares aren't up much year to date, they've enjoyed a huge run-up over the past 12 months and MSFT has moved back to being a "blended" large cap. It's no longer a value play, but it's not really a growth stock, either.
So, what should we expect for these two tech titans?
Let's check it out:
GOOGL looks underpriced in terms of volatility here:
Options are pricing a move of around 5% -- and for a $500 billion + company, that's huge. But a $40 move for this roughly $780-a-share stock doesn't feel out of reach. The stock faces resistance around $800 on the upside, but I expect the momentum traders to chase should we push above that level.
The downside support comes in around $765, and then again at $740. I don't expect the first support level to hold if GOOGL disappoints, but there's the chance that the stock gets clogged in the $760-$770 range based on recent trading.
Still, I would expect us to gap below $760 if tonight's numbers underwhelm investors. At the very least, I'd expect the stock to test $740. Personally, I'd be interested in buying any gap down and bounce off of $710.
I'm not overly bullish on Microsoft heading into tonight's earnings report, but the downside appears limited here:
I'm looking at $54 a share on the downside, although I'd have concerns should we break $53.50. As for the upside, I expect that would be limited to around $1.40 a share.
In other words, I don't expect a big move here when compared to the stock's expected volatility. And while I might try to make a distinction in terms of technical indicators, MSFT and GOOGL are basically identical.
How to Play Tonight's Reports
If I were going to trade anything here, I would lean toward GOOGL and probably look at a combination trade.
For instance, on the bullish side, I would look at the $800-$820 call spread for a play expiring either this week or next. (Obviously a trade expiring tomorrow is going to be a hero or a goat.)
If I were going to focus only on this week, then the April 22 $790-$825-$840 skip-strike call butterfly for $9.10 to $9.40 would be my trade of choice. The breakeven for that is right below $800 (a resistance level), and the trade offers a $25-a-share potential profit should GOOGL's upside equal current expectations. Even if GOOGL ran over $840, this trade would still have a $20 value.
On the flip side, I would likely use a $760-$740-$720 put butterfly for $3.20 if I were leaning bearish. And on the "lottery bear" side, I would bump that down to $740-$710-$680 for around $3.70.
Again, I'm leaning toward the upside on GOOGL, but my capital outlook here would be small no matter which direction I chose.