Is Microsoft’s Stock a Sell After Earnings?

With shares of Microsoft (NASDAQ:MSFT) trading for slightly less than $30 per share as they have been for the entire month of October, is MSFT a BUY, a WAIT and SEE, or a STAY AWAY. Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movemnt

Microsoft reported fiscal first quarter results on Thursday that fell short of analysts predictions. Following declining sales of its flagship operating system Windows, the company’s net income decreased by 22 percent in the three months ended in September, falling to $4.47 billion, or 53 cents per share. Analysts polled by Bloomberg had expected the Washington-based software company to post net income of 56 cents per share.

Net income declined largely because of low PC shipments, which declined by 8.3 percent from the year-earlier quarter. According to research firm Gartner, shipments totaled only 87.5 million units in the three month period.

Competition from tablets and global economic weakness also affected the company’s results.

During the quarterly conference call, Peter Klein, the company’s Chief Financial Officer, said that both a tough economic environment and competitive pressures posed challenges to the PC market. However, he added that with services like SkyDrive, which allows users to store and manage data online, the recently announced Xbox Music, and the Windows 8 operating system, the company will have refreshed nearly all of its major products.

Microsoft explained the quarter’s 33 percent decrease in Windows sales in the conference call as well. Klein said that Original Equipment Manufacturers, or OEMs, decreased their Windows 7 inventories in preparation for the release of Windows 8 later this month. Sales of the Windows operating system did not only decrease, but they also missed analysts expectations of $3.64 billion.

“The Microsoft numbers are a little worse than expected, but for Wall Street, it’s all about Windows 8,” Sanford C. Bernstein analyst Mark Moerdler told Bloomberg.

“Looking forward, we eagerly anticipate the launch of Windows 8,” said Klein. “We are bringing a new range of capabilities and scenarios to Windows and with support system-on-chip architecture we are moving beyond the traditional PC to the widest range of Windows hardware we have ever seen.”

The company did beat analysts expectations in one area; multiyear contracts, which are a measure of future sales, amounted to $19.6 billion. Analysts surveyed by Bloomberg expected contracts to total $19.3 billion.

T = Trends Don’t Support the Industry in which the Company Operates

Intel’s (NASDAQ:INTC) quarterly earnings proved to be a harbinger of poor quarterly results for the entire industry. The world’s largest manufacturer of semiconductors reported third-quarter earnings on Tuesday that showed margins under pressure as consumer purchases shift away from traditional computers towards handheld electronics.

Overall, the market for personal computers is expected to contract by 1.2 percent this year, falling to 348.7 million units, according to market researcher IHS ISuppli. It will be the first annual decline since 2001.

Lower PC demand hurt orders of chips throughout the industry; following Microsoft’s earnings report, Marvell (NASDAQ:MRVL) offered a third quarter earnings forecast that decreased from its previous guidance. The Bermuda registered company projected a revenue of $765 million to $785 million, which is down from an earlier estimate of $800 million to $850 million.

Advanced Micro Devices (NYSE:AMD), the second largest producer of PC processors, also reported quarterly results that fell short of analysts’ predictions.

In the company’s conference call, the General Manager of Investor Relations Bill Koefoed said, “We saw the overall PC market decline this quarter in advance to the launch of Windows 8 and in part due to competitive pressures and the challenging macroeconomic climate.”

Microsoft is hoping Windows 8, which will be available beginning next week, will lift demand for PCs, convince consumers to purchase tablets running Windows rather than Apple’s (NASDAQ:AAPL) iOS or Google’s (NASDAQ:GOOG) Android, and improve the company’s future earnings.

Following the earnings release Zack’s analysts maintained their hold recommendation on the stock, saing that “Microsoft had a more or less regular quarter.”

Microsoft looks like a WAIT and SEE based on the key metrics above.

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