Benzinga - Microsoft is not affiliated with Direxion Shares ETF Trust, its investment adviser or any affiliates and is not involved with the Funds in any way. Investing in the Funds is not equivalent to investing in MSFT.
Microsoft Corporation (NASDAQ: NASDAQ:MSFT) (Microsoft) released earnings in late October. The tech giant managed to beat expectations for its top-line revenue growth and earnings-per-share (EPS)*, but still suffered a 7% decline the next day.
The reason? Weak forward growth guidance and missed expectations from its cloud business segment, one of its strongest drivers of revenue recently. CEO Satya Nadella noted that the slow anticipated growth was due to cyclicality affecting Microsoft's consumer line.
According to CFO Amy Hood, this was largely caused by a weak demand for PCs and Windows software during Fall 2022, which management expects to last throughout the next quarter. The conservative guidance clearly spooked investors, despite analysts reiterating their buy ratings.
In light of this mixed earnings report, Microsoft's share price may remain volatile heading into the holiday shopping season. Whether you're bullish or bearish on Microsoft in the short-term, trading short-term using Direxion's pair of single-stock Microsoft ETFs (described below) could be a viable strategy.
Trading Microsoft: fundamentals vs macro-economics As one of the leading constituents in the S&P 500® Index,* NASDAQ 100® Index,* and the Dow Jones Industrial Average,* Microsoft's share price is affected by internal and external factors. Traders can take positions based on their analysis of its fundamentals or the broad market as a whole.
Trading volume and volatility for Microsoft tends to surge around its quarterly earnings reports. Microsoft has not formally confirmed its next earnings report date, but it is estimated to be around January 24, 2023, based on previous releases.
For fundamentals, traders can focus on their predictions for whether or not Microsoft's future revenues may exceed or fall short of their recent conservative guidance. This will largely depend on not only PC and software sales, but also revenue from their cloud business.
For the broader market environment, traders can focus on the continued outperformance of the U.S. dollar and upcoming U.S. central bank monetary policy.
Microsoft was affected by a surging U.S. dollar which has recently hit 20-year highs. Last quarter, unfavorable foreign exchange rates reduced revenue by $595 million and EPS by 4 cents. With the economies of countries like the U.K. and Japan in turmoil, the stability offered by the U.S. dollar may persist.
A massive short-term catalyst will be the next Federal Open Market Committee (FOMC) meeting on December 13 – 14. Earlier on November 2, Chairman Jerome Powell delivered a fourth consecutive 75 basis point* hike but hinted that a pivot might be underway in the future.
That being said, slowdowns in the U.S. economy, signs of inflation peaking, and trouble in the bond market have raised hopes about a potentially dovish Fed pivot.
What to use to trade Microsoft The most common way to trade Microsoft with enhanced, leveraged exposure is via options* or margin.* While readily accessible to most traders, both of these methods can result in undesirable risks.
A possible alternative to options or margin may be to use leveraged & inverse exchange-traded funds, or ETFs. Direxion’s Daily MSFT Bull 1.5X Shares (MSFU) and Daily MSFT Bear 1X Shares (MSFD) can be a viable instrument for short-term traders.
MSFU seeks daily investment results, before fees and expenses, of 150% of the daily performance of Microsoft, while MSFD seeks daily investment results, before fees and expenses, of 100% of the inverse (or opposite) of the daily performance of Microsoft.
Both ETFs do not invest directly in Microsoft. Rather, they invest in derivatives, including swap contracts, to obtain daily leveraged or inverse exposure. Traders must understand that the leverage target is daily and the Funds should not be expected to achieve their investment objective for a period of time different than a trading day. Trading with leveraged and inverse ETFs like MSFU and MSFD allows traders to focus on anticipating the short-term direction Microsoft's stock might move. Unlike options, there's no need to account for volatility or expiry dates. Unlike margin or short selling, your risk is limited to the amount paid for shares of each ETF.
As with all leveraged or inverse ETFs, MSFU and MSFD can be a powerful way to achieve short-term exposure but only if traders do their due diligence on Microsoft's short-term outlook, have a strong investment thesis, possess a high-risk tolerance, and actively monitor their investments.
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.
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*Definitions
- Earnings per share (EPS) is a company's net profit divided by the number of common shares it has outstanding. EPS indicates how much money a company makes for each share of its stock and is a widely used metric for estimating corporate value.
- Option is a contract which conveys to its owner, the holder, the right, but not the obligation, to buy or sell a specific quantity of an underlying asset or instrument at a specified strike price on or before a specified date, depending on the style of the option.
- Margin is the collateral that a holder of a financial instrument has to deposit with a counterparty to cover some or all of the credit risk the holder poses for the counterparty.
- Nasdaq-100® Index: The Index includes 100 of the largest domestic and international non-financial companies listed on the NASDAQ Stock Market ® based on market capitalization. All companies listed on the index have an average daily trading volume of at least 200,000 shares. One cannot directly invest in an index.
- S&P 500® Index: Standard & Poor’s ® selects the stocks comprising the S&P 500 ® Index on the basis of market capitalization, financial viability of the company and the public float, liquidity and price of a company’s shares outstanding. The Index is a float-adjusted, market capitalization-weighted index. One cannot directly invest in an index.
- The Dow Jones Industrial Average, Dow Jones, or simply the Dow, is a stock market index of 30 prominent companies listed on stock exchanges in the United States. The DJIA is one of the oldest and most commonly followed equity indices.
- Basis point: one hundredth of 1 percentage point.
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.
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. These securities may fall in and out of favor with investors rapidly, which may cause sudden selling and dramatically lower market prices. Technology securities may be affected by intense competition, obsolescence of existing technology, general economic conditions and government regulation and may have limited product lines, markets, financial resources or personnel.
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; operations, including excessive outages, data losses or disruptions of online services; quality or supply problems; legal, regulatory and litigation risks; and the ability to attract and retain talented employees.
Direxion Shares Risks – An investment in each 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. Investors could lose the full principal value of his or her investment in a single day. 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. 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. Risks of the Funds include Effects of Compounding and Market Volatility Risk, Leverage Risk, Derivatives Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Daily Correlation/Tracking Risk, Microsoft Corporation Investing Risk, Single Security Risk, Market Risk, Indirect Investment Risk, Trading Halt Risk, and risks specific to the technology sector. Additional risks include, for the Direxion Daily MSFT Bear 1X Shares, risks related to Shorting and Cash Transactions. Please see the summary and full prospectuses for a more complete description of these and other risks of the Funds.
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