Is Microsoft a Good Portfolio Play?

With shares of Microsoft (NASDAQ:MSFT) trading around $39, is MSFT an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Microsoft is engaged in developing, licensing, and supporting a wide range of software products and services. The company also designs and sells hardware and delivers online advertising to customers. It operates in five segments: Windows and Windows Live, Server and Tools, Online Services Division, Microsoft Business Division, and Entertainment and Devices. As a mature company, Microsoft is also offering a stable dividend, which is currently yielding around 3.32 percent annually.

When you’re falling behind the competition, what do you do? If you’re Microsoft and you see that Sony’s (NYSE:SNE) PlayStation 4 is outselling the Xbox One month after month, you need to do something bold. That’s just what Microsoft did earlier this week when it announced a cheaper version of the console that doesn’t include a Kinect peripheral. The company has just followed up by announcing more details about its most highly anticipated game, the next Halo. In a post on Microsoft’s website Friday morning, developer 343 Industries revealed that the next installment of the popular series will be called Halo 5: Guardians. The game is set to release exclusively for Xbox One in fall 2015.

T = Technicals on the Stock Chart Are Mixed

Microsoft stock has been pulling back in recent times. The stock stock is currently trading sideways and may need time to consolidate before heading higher. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Microsoft is trading between its rising key averages, which signals neutral price action in the near-term.

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Microsoft options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Microsoft options

16.03%

0%

0%

What does this mean? This means that investors or traders are buying a small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

June Options

Average

Average

July Options

Average

Average

As of Tuesday, there is average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Microsoft’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Microsoft look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

-5.56%

2.63%

-3.08%

11.94%

Revenue Growth (Y-O-Y)

-0.44%

14.26%

7.36%

10.17%

Earnings Reaction

0.12%

2.09%

5.96%

-10.85%

Microsoft has seen mixed earnings and increasing revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about Microsoft’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Microsoft stock done relative to its peers – Apple (NASDAQ:AAPL), Oracle (NASDAQ:ORCL), and Google (NASDAQ:GOOG) — and sector?

Microsoft

Apple

Oracle

Google

Sector

Year-to-Date Return

10.55%

9.89%

10.66%

-4.02%

7.77%

Microsoft has been a relative performance leader, year-to-date.

Conclusion

Microsoft is a technology company that provides valuable software products and services to consumers and companies worldwide. The company announced that Halo 5: Guardians is set to release exclusively for Xbox One in fall 2015. The stock has been pulling back in recent times and is currently trading sideways. Over the last four quarters, earnings have been mixed while revenues have been increasing, which has produced mixed feelings among investors. Relative to its peers and sector, Microsoft has been a relative year-to-date performance leader. Look for Microsoft to OUTPERFORM.

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