Where Will Microsoft Go Next?

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’s new CEO, Satya Nadella, is already shaking things up, as various reports say two long-time executives are set to leave the company soon. The executive shuffle was first reported by Re/code on Sunday. Anonymous sources told the publication that Nadella notified staff on Friday that there would be some changes, which are expected to be officially announced on Tuesday. The sources said that Skype CEO and head of business development, Tony Bates, and marketing leader, Tami Reller, are among those leaving the company. Vice president of advanced strategy, Eric Rudder, will replace Bates, and marketing executive Chris Capossela will take Reller’s spot. Nadella is also making changes to the role of strategy. Capossela will be in charge of both marketing and advertising, while the current vice president of advertising and strategy, Mark Penn, will focus on strategy alone.

Penn is a former aide to Hillary Clinton — he advised her 2008 bid for the presidency — and was described by the New York Times as being a “polarizing figure” at Microsoft. He was responsible for the company’s “Scroogled” campaign that was meant to raise suspicions about Google (NASDAQ:GOOG) in a political-style attack ad, but it was criticized within Microsoft and seen by some as a cheap shot at the company’s rival. Both the Times and Re/code said the shift is mostly a horizontal one for Penn, not a demotion or a promotion.

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 trading sideways and may need time to stabilize. 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.

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

21.46%

36%

33%

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 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 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%

20.00%

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 had conflicting feelings about Microsoft’s recent earnings announcements.

P =Average 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?

Microsoft

Apple

Oracle

Google

Sector

Year-to-Date Return

0.53%

-6.68%

0.54%

6.86%

1.31%

Microsoft has been an average performer, year-to-date.

Conclusion

Microsoft is a technology company that provides valuable software products and services to consumers and companies worldwide. The company’s new CEO, Satya Nadella, is already shaking things up, as various reports say two long-time executives are set to leave the company soon. 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. However, investors have had conflicting feelings about recent earnings announcements. Relative to its peers and sector, Microsoft has been an average year-to-date performer. Look for Microsoft to OUTPERFORM.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

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