Business & Finance Finance

A Cheap Strategy To Play Microsoft

Bill Gates is super rich but his once high-flying computer software organization has been inside the doldrums since mid-2002 after falling from the $35 level. The issue with Microsoft (MSFT) may be its failure to grow both its revenues and earnings at the superlative rates the organization when enjoyed.

Any company the size of Microsoft, with a market-cap of $242 billion, will discover growth an issue because of its size. But this is not to say the stock is dead. Far from it, Microsoft remains a viable long-term software organization and is cash rich with $34 billion or $3.28 per share in money. This gives the stock lots of financial flexibility to develop or acquire growth technologies. Microsoft just announced it would invest $1.1 billion in R&D at its MSN Internet unit within the FY07. And according for the Wall Street Journal, Microsoft is exploring the possibility of getting 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 company has its function cut out for it. Trading at 16.30x its estimated FY07 EPS of $1.44, the stock is not costly but appears to become priced not like a growth stock.

Its PEG for the surface of 1.51 is not low-cost, but if you discount in the money 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. In case you want to play the stock but do not want to shell out the $2,347 for a 100-share block, you may want to take a examine the long-term options, also known as LEAPS. For instance, the in-the-money January 2008 $22.50 Microsoft Call LEAPS not set to expire till January 18, 2008 currently costs $380 a contract (100 shares)

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

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

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