Microsoft Building on Games in Unique Ways
Companies often talk about synergy. The word is formally defined as “the interaction or cooperation of two or more organizations, substances, or other agents to produce a combined effect greater than the sum of their separate effects.”
Synergy is an important concept in business. It’s the reason for many acquisitions. For example, a company that sells potato chips could benefit from the acquisition of a company that makes pretzels since the disruption of the two products would be so similar.
But, occasionally synergies are less obvious to investors and only the very best management teams can find the link between what appears to be unrelated businesses.
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Microsoft Mines Games for Other Uses
It was about four years ago when Microsoft (Nasdaq: MSFT) acquired Mojang, the developer of the video game Minecraft.
According to CNBC, “…Minecraft had more to offer Microsoft than just a wildly popular game with 91 million monthly active users and 250 million downloads. The technology is now being used to help employees get acquainted with a refresh of Microsoft’s sprawling campus in Redmond, Washington.
Earlier this year, Microsoft enlisted Blockworks , a company that uses Minecraft’s digital building blocks for designing real-world projects, to create a miniature rendering of the campus facelift , which is scheduled for completion in 2022.”
They’re using graphics that are far more immersive than two-dimensional photos and videos.
While Minecraft was designed for gamers, its immersive nature and the ability to quickly move around and construct edifices makes it easy to see how new buildings will look when inserted into an existing landscape.
Microsoft recognized the potential of the game and introduced an education edition two years ago. It has racked up 35 million licensed users.
“When you build in Minecraft, you build everything in the perspective of the player, constantly being aware of the sense of scale,” said James Delaney, a managing director at Blockworks, which says on its website that it uses Minecraft “to create experiences, communities and learning environments.”
Riku Pentikainen , who until recently was director of global workplace strategies inside Microsoft’s real estate and facilities group, saw his son playing Minecraft earlier this year and was intrigued by how the game could help the company with its transition.
Employees could learn and get excited about the remodeling long before they could check it out on foot, and in a more dynamic way than what was available through typical renderings.
Microsoft brought in architecture firm Gensler, along with Andrew Yang, a project manager, to work with internal staff, including Peter Zetterberg of Microsoft Studios, and Amy Stevenson, Microsoft’s archives manager, who provided pieces of history about campus landmarks.
They got approval from Phil Spencer, Microsoft’s executive vice president for gaming, to use Minecraft for the project, Yang said.
From there, the group issued a request for proposals, ultimately deciding on Blockworks, which had done work for Disney DIS , Warner Bros. and the Museum of London, as well as Microsoft.
The mandate for Blockworks was to have a virtual campus set up within a few weeks, in time for a Microsoft hackathon on July 27.
A half-dozen people at Blockworks began constructing buildings off drawings from Gensler. Delaney said Minecraft forces designers to sacrifice some accuracy because structures in real life don’t always have the game’s squared-off look, but the speed and ease of use more than made up for those deficiencies.
It might take just 10 minutes to wrap up a single building, he said.
Minecraft also appeals to a broader audience of younger people, who might not know how to use computer-aided design, or CAD, programs, which require extensive training and aren’t as collaborative.
“Traditional CAD tools don’t allow for that sense of awareness,” said Delaney, who explored the use of Minecraft as a way to democratize architecture during his studies at the University of Cambridge.
Innovative management like this has contributed to the up trend in the stock.
Recently, MSFT pulled back with the broad market but appears to be leading a potential turnaround in the market.
A Trade for Short Term Bulls
As with the ownership of any stock, buying MSFT could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.
A Specific Trade for MSFT
For MSFT, the November 16 options allow a trader to gain exposure to the stock.
A November 16 $113 call option can be bought for about $1.02 and the November 16 $116 call could be sold for about $0.23. This trade would cost $0.79 to open, or $79 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $79.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in MSFT the maximum gain is $2.21 ($116 – $113 = $3.00; $3.00 – $0.79 = $2.21). This represents $221 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $79 to open this trade.
That is a potential gain of about 279% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.
In this trade, options provide income and defined risk. These are the type of strategies that are explained and used in TradingTips.com’s Extreme Profits Calendar service. This service uses seasonals as one indicator in its trade selection process. To learn more about how options can be used to meet your goals, click here for details on Extreme Profits Calendar.