Is Microsoft Enticing After Recent Headlines?

With shares of Microsoft (NASDAQ:MSFT) trading around $38, 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 is preparing to release the highly anticipated new first-person shooter game Titanfall, which the company hopes will become a console-making device and boost sales of the new Xbox One after falling behind the competing PlayStation 4 made by Sony (NYSE:SNE). Titanfall is set to be released on Tuesday and has already garnered much buzz from the gaming press. “Titanfall represents a potent fusion of established and modern design ideas, creating a tense and rewarding balance of power and moment-to-moment unpredictability,” said a review from IGN based on a preview the publication got at a private event hosted by Electronic Arts (NASDAQ:EA), which is the publisher of the title.

IGN’s only complaint was that there isn’t a single-player option, as you always have to play with others via the Internet. Gamesradar said in a four-star review, “You kill fast, die fast, and move faster than you do in most other shooters, making for short, brutal matches that you’ll want to keep playing again and again,” but complained about a lack of originality. “You’ll eventually hit a point — like you do in nearly every game — where you feel as though you’ve done everything there is to do, and because you’re still just playing Team Deathmatch or Capture the Flag, that time comes quicker than you might think.”

T = Technicals on the Stock Chart Are Mixed

Microsoft stock has seen its fair share of volatility over the last several years. The stock is currently trading sideways and may need time to consolidate. 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 signals neutral to bullish price action in the near-term.

MSFT

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

20%

23%

20%

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

Put IV Skew

Call IV Skew

April Options

Flat

Average

May Options

Flat

Average

As of Tuesday, there is 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 minimal 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?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

2.63%

-3.08%

11.94%

20%

Revenue Growth (Y-O-Y)

14.26%

7.36%

10.17%

17.71%

Earnings Reaction

2.05%

5.96%

-10.85%

3.36%

Microsoft has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been optimistic 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

1.87%

-4.14%

1.36%

7.88%

2.74%

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 is hoping that in releasing the new first-person shooter game Titanfall, it will become a console-making device and boost sales of the new Xbox One. The stock has been moving higher in recent years but is currently trading sideways. Over the last four quarters, earnings and revenues have been rising, which has left investors optimistic about recent earnings announcements. 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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