Trade Bite: Time for a Softer but Still Hard Buy on Microsoft

Softee's been getting killed of late as the weekend passed and everybody was shocked that Yahoo and Softee haven't resolved anything yet.

MSFT's down from almost 30% from its highs late last year, and down about 20% from its more recent highs.  Meanwhile, earnings and revenues have been steadily growing faster than the street's modeled and the report last week was another pretty darn good one.  But it's all about the Yahoo courtship right now.  And that's got the stock acting like punk.

You want to buy "punk".  Later you can sell "rock" if the stock does indeed rock.  Vista's been a disappoint in many ways and Apple's going to continue to kill Microsoft among consumers.  Eventually, Apple might finally break into some enterprise market share, but they'll never have much more than 2 or 3% in business computer market share -- at least for another decade or so.  There's also Zune of course -- as if that matters to the stock or the company.  Xbox is indeed an important franchise and it is Microsoft's own Trojan Horse in the living room / to stay relevant to the consumer.

Xbox kids are going to be increasingly watching movies, shows, talking and playing on the XBox networks over the next few years.  And it'll be very profitable for Softee along the way.  Content and content distribution models come with high margins, as evidenced by media companies and cable/telco models.  Xbox is as important to the future of Softee as search is.

At any rate, I think Softee's a good trade to the long side here around $28.  I might use a little bit of common stock, but I'd also look at using some slightly-in or slightly-out of the money calls dated a couple months out.  Say the August 27.50s or September 30s or something.

To be clear, I'm not saying MSFT's a great stock to buy and load up on here...as for example I'd been saying when I'd pounded the table on Softee back in summer of 06 when it was in the low $20s, I used a lot of common and long-dated as well as short-dated calls and I even shorted some puts (which means I borrowed some MSFT put options and sold them for market price.  As the stock went up, the puts became worthless and I pocketed the money from the sell as gains for the P&L, see?).  I wouldn't advocate that approach now at all.

I'd probably just put a little bit of capital into some calls.