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Goldman Sachs recommends clients buy call options on Apple and Microsoft ahead of each company’s earnings reports in the coming weeks. The firm wrote in a Wednesday note that call options in both tech titans are attractively priced and the firm’s company analysts see positive signs into the reports. A call option is a contract to buy a stock at a set price at a set time in the future. The option value increases if the stock price rises above that set price. For Apple, Goldman thinks the mobile app spending portion of the company will beat Wall Street expectations and service revenue will become the main force behind earnings growth. “Goldman Sachs Hardware analyst Michael Ng believes services is the most underappreciated aspect of AAPL’s revenue mix and expects 62% of incremental gross profit over FY 2022-27 to come from services,” the note from Goldman’s derivatives desk stated. “While app spending growth has slowed, as we lap recent benefits from consumer stimulus and engagement benefits due to the pandemic he expects app spending to resume mid-teens growth in F2024.” AAPL YTD mountain Apple could beat expectations in mobile app spending and boost shares as investors look toward earnings, according to Goldman Sachs. Apple will report fiscal second-quarter earnings on May 4. Shares were 2% higher on Wednesday, changing hands around $163.43 per share. “AAPL option prices are attractive ahead of earnings, in our view, with one-month implied volatility of 29 only in its 28th percentile relative to the past year,” Marshall said. “Also, put-call normalized skew increased since mid-March and is currently in its 80th percentile relative to the past year, indicating investors have increased their bearish positioning and call-buying is attractive relative to put-buying.” Goldman recommends buying the $160 calls expiring April 28th. Meanwhile, Goldman is also bullish on Microsoft, citing the company’s incorporation of artificial intelligence software into products like Bing on the heels of the breakout success of ChatGPT earlier this year. The company has expanded AI further into its list of products, including Microsoft 365 suite, GitHub Copilot, Power Apps, Azure and OpenAI Services among others. Microsoft will report second quarter earnings on April 25. Shares of the tech giant were 1.4% higher on Thursday. MSFT YTD bar Microsoft’s recent investments into artificial intelligence and integration into consumer facing products has caught Goldman’s eye. “Goldman Sachs Software analyst Kash Rangan views MSFT as a prime beneficiary of the secular need for digitization that can see a long-tailed boost from generative AI as it is increasingly incorporated into its product suite,” stated the note. “AI-related 12 April 2023 3 Goldman Sachs Weekly Options Watch workloads can also provide a boost to Azure over time. In the near-term, Kash also expects revenue and EPS growth to trough in 2Q.” Meanwhile, Goldman noted that the options market has become increasingly bullish on Microsoft in recent weeks, and the firm suggests investors buy the April 28th call contract with a $280 strike, which is trading at roughly 2.5% of the stock’s trading price. Correction: Apple is scheduled to report earnings May 4. A previous version misstated the date.
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