Should You Consider Microsoft?

With shares of Microsoft (NASDAQ:MSFT) trading around $44, 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.

The software giant just announced earnings for the second quarter of its fiscal 2014 after markets closed. For the quarter ended June 30, net income fell 7 percent to $4.61 billion, while per share earnings also declined 7 percent, to 55 cents, beating analysts’ estimates of 60 cents. Revenues for the quarter jumped 18 percent year over year to $23.4 billion, topping analysts’ estimates of $22.99 billion. The company said the latest results showed a strong demand trend in sales, which were driven by strength in Microsoft’s cloud offerings.

T = Technicals on the Stock Chart Are Strong

Microsoft stock has been trending higher over the last couple of years. The stock is currently trading near all-time highs and looks poised to continue. 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.

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

19.48%

43%

40%

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

Put IV Skew

Call IV Skew

August Options

Flat

Average

September Options

Flat

Average

As of Wednesday, 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 significant 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 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 Q2

2014 Q1

2013 Q4

2013 Q3

Earnings Growth (Y-O-Y)

-6.24%

-5.56%

2.63%

-3.08%

Revenue Growth (Y-O-Y)

17.49%

-0.44%

14.26%

7.36%

Earnings Reaction

0.29%*

0.12%

2.09%

5.96%

*As of this writing

Microsoft has seen decreasing earnings and increasing revenue figures over the last four quarters. From these numbers, the markets have been pleased with 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)(NASDAQ:GOOGL) — and sector?

Microsoft

Apple

Oracle

Google

Sector

Year-to-Date Return

19.82%

18.17%

5.67%

6.24%

13.47%

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 stock has been trending higher over the last couple of years and is currently trading near all-time highs. Over the last four quarters, earnings have been decreasing while revenues have been increasing, which has left investors pleased. Relative to its peers and sector, Microsoft has been a relative year-to-date performance leader. Look for Microsoft to OUTPERFORM.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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