MSFT Stock Up on Job Cut News, More Gains Ahead

Microsoft Corp. (Nasdaq: MSFT) Chief Executive Officer Satya Nadella announced today that the company will be cutting 18,000 jobs, a move that will eliminate 14% of the company's workforce. Following the news, Microsoft stock was up 3% in morning trading.

In an email to employees, Nadella noted that the first 13,000 jobs will be cut within the next six months. He also said that 12,500 of the cuts will come from its Nokia division, which MSFT officially acquired in April. More details about the cuts will be announced when Microsoft makes its public earnings call Tuesday.

"It's important to note that while we are eliminating roles in some areas, we are adding roles in certain other strategic areas," Nadella said.

In the email, it's clear that the layoffs are meant to streamline Microsoft's business. Nadella also contends that the job cuts will help Microsoft modernize its engineering processes.

"First, we will simplify the way we work to drive greater accountability, become more agile, and move faster," Nadella said.

"[W]e plan to have fewer layers of management, both top down and sideways, to accelerate the flow of information and decision making. This includes flattening organizations and increasing the span of control of people managers. In addition, our business processes and support models will be more lean and efficient with greater trust between teams. The overall result of these changes will be more productive, impactful teams across Microsoft."

Nadella previously hinted that Microsoft would be making organizational changes last week in an employee memo.

Since then, Microsoft stock has climbed 9% in just five trading sessions. Yesterday, MSFT stock closed at $44.08, its highest value since 2000. In 2014, Microsoft stock is up more than 21%. It's gained more than 27% in the last 12 months.

Today's job cut announcement sent shares to 52-week highs, but now the big question is if MSFT stock can maintain its momentum.

Here's why things look good for the tech giant...

Where Microsoft Stock Is Headed

According to Barron's, MSFT stock has seen an influx of September $44 calls from options traders in the last 10 days, meaning investors are bullish on Microsoft stock long-term.

Typically, calls that expire close to an important date are purchased by options traders looking to capitalize on a specific event. The fact that many investors are buying September calls, even when Microsoft reports earnings Tuesday, indicates that investors are bullish on MSFT well past its earnings date.

Currently, there are approximately 55,000 outstanding contracts on MSFT stock.

"If the stock were to hit $50, for example, the calls now trading around 64 cents would be worth $6," Barron's Steven M. Sears said yesterday. "Most of the calls traded at the asking price, which indicates they were probably bought by institutional investors."

Insider or institutional buying is another bullish sign for a stock, because it indicates optimism among the company's inner circle.

"There's really only one good reason for insiders to be buying shares of their company - they believe better times are ahead and that the stock is destined to rally," Money Morning's Defense and Tech Specialist Michael A. Robinson said. "In fact, spotting insider buying is a good way to consistently beat the market. Basically, this is about as bullish an indicator of a company's future as you can find."

Robinson said after the last MSFT earnings report in April that the company - under Nadella's leadership - was making progress in multiple areas now.

"I'm feeling a lot more optimistic about [Nadella] as a leader... he's come out like gangbusters, and has great reviews from analysts across Wall Street," Robinson said. "Microsoft needs to continue driving down costs and keeping its margins up."

And slimming its workforce by 14% today was a major step toward driving down costs.

"At this point, it's all about execution," said Robinson. "They need to do everything well."

Today's announcement created a nice bump for MSFT shares, and if Tuesday's earnings report show strong forward guidance figures, another bump is likely. But that may just be the beginning in a new era for MSFT stock.

"[T]he interest in September expiration suggests investors are taking a longer view of Microsoft, and positioning for the new CEO to continue to announce investor-friendly news..." Sears said.

Share this story on Twitter @moneymorning and @KyleAndersonMM using #Microsoft.

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