Can Microsoft Continue Higher?

With shares of Microsoft (NASDAQ:MSFT) trading around $40, 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.

Microsoft announced Tuesday more than one way it was going to make the Xbox One a more accessible platform for users. One was free access to a number of online features. The other was a large price reduction for the console, bringing it in-line with its major competitor, Sony’s (NYSE:SNE) PlayStation 4. While it may help some, it may not be enough. Once both Sony and Microsoft had announced the specs for their devices, it become strikingly apparent that the PS4 was more of a graphic performance powerhouse than the Xbox One. When the prices were announced, it was even more shocking that the Xbox One would be the more costly of the two. Of course, the Xbox One did come bundled with the new and improved Kinect camera for gesture- and voice-based controls as well as immersive gaming. However, not everyone wanted to shell out the extra cash for this.

As of late, the PS4 has been showing itself as the victor in the battle between these two. In both March and April, the PS4 dominated for both hardware sales and software sales. As it stood at the end of April, the PS4 had 2.93 million units sold over the Xbox One, an increase in the disparity by about a quarter-million units from the previous month. With strong pre-orders for Watch Dogs and Destiny, the PS4 appears as though it’s only going to continue racing away — especially if it can beat the Xbox into the newly opened Chinese market, where neither console has been able to sell. Acknowledging some of its sales difficulties, Microsoft is lowering the price of the Xbox to a base of $399 without the Kinect bundled in. It’s also offering free access to some popular apps like Netflix — though separate subscriptions will still be needed for some services. The price drop and free services will surely help make the console a better sell in the public eye, but the early battle for console supremacy is important, and Microsoft may have already lost.

T = Technicals on the Stock Chart are Strong

Microsoft stock has been pulling back in recent times. The stock is currently moving higher and looks set to continue this path. 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 above its rising key averages which signal neutral to bullish 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




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



July Options



As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral to bullish 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 Increasing 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)





Revenue Growth (Y-O-Y)





Earnings Reaction





Microsoft has seen mixed earnings and increasing revenue figures over the last four quarters. From these numbers, the markets have had conflicting 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), Google (NASDAQ:GOOG), and sector?






Year-to-Date Return






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


Microsoft is a technology company that provides valuable software products and services to consumers and companies worldwide. The company is lowering the price of the Xbox to a base of $399 without the Kinect bundled in. The stock has been pulling back in recent times, but is currently moving higher. Over the last four quarters, earnings have been mixed while revenues have been increasing, which has produced conflicting 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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