Is Microsoft Enticing After Recent Headlines?

With shares of Microsoft (NASDAQ:MSFT) trading around $37, 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 likely to appoint its cloud-computing head, Satya Nadella, as its next chief executive, a source familiar with the matter said on Thursday as the board concludes a five-month search for a tech-savvy heavy hitter to lead the world’s largest software company. As part of the move, co-founder Bill Gates may step aside as chairman and be replaced by lead independent director John Thompson, said the source, speaking on condition of anonymity because the process is private. Gates would remain a director, the source added. Bloomberg first reported the news on Thursday. Rising star Nadella, a native of Hyderabad, India — where Microsoft has its largest non-U.S. research center — was promoted to run the company’s fast-expanding cloud, or Internet-based, computing initiatives in July last year as part of current CEO Steve Ballmer’s radical reorganization of the company.

T = Technicals on the Stock Chart Are Strong

Microsoft stock has seen its fair share of volatility over the last several years. The stock is currently surging higher 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.

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

25.28%

13%

11%

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

February Options

Flat

Average

March Options

Flat

Average

As of Friday, 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 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) — and sector?

Microsoft

Apple

Oracle

Google

Sector

Year-to-Date Return

0.11%

-11%

-3.55%

5.06%

1.54%

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 likely to appoint Satya Nadella as its next chief executive. The stock has been moving higher in recent years and looks poised to continue. Over the last four quarters, earnings and revenues have been rising, which has pleased 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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