Will Microsoft’s Stock Continue To Trend Lower?

With shares of Microsoft (NASDAQ:MSFT) trading at around $27.36, 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 Movement

Despite having sold 40 million copies of Windows 8 in one month, Microsoft’s stock has seen a moderate decline in that timeframe. Keep in mind there are 300 million people in America. Therefore, 40 million sales in one month is massive. However, that’s Microsoft. This is a company that continuously can’t get out of its own way when it comes to its stock. Every time there’s a spike, it comes right back down a few months later. What’s the reason behind this?

As simple as it sounds, CEO Steve Ballmer might be the problem. He’s a brilliant man, but he’s not brilliant in a Steve Jobs or Bill Gates kind of way. He’s best known for his strange antics and embarrassing motivational speeches, but what is more important is the stock’s performance since he took over as CEO in 2000. Since that time, there has been no appreciation whatsoever.

On the positive side, Microsoft offers a 3.40% yield and a solid business, which makes the stock slightly attractive and keeps it buoyed.

E = Debt to Equity Ratio is Low

Microsoft has a debt-to-equity ratio of .17, which is low. Microsoft’s main competitor, Google (NASDAQ:GOOG), has a debt-to-equity ratio of .09. Microsoft’s numbers are impressive in almost every area, but they’re not as impressive as Google’s numbers in any area, including cash vs. debt.

Microsoft has $66.64 billion in cash and $11.95 in debt. Google has $45.72 in cash and $2.99 billion in debt. However, these numbers aren’t important since both situations are healthy. This is just to point out that Google dominates this competition, which has even led to some poor sportsmanship on Microsoft’s part. We will cover that below…

T = Technicals on the Stock Chart Are Subpar

Microsoft has underperformed the S&P 500 for the better part of three straight years.

Over the past month, Microsoft is down 2.76% while the S&P 500 is down .66%. Year-to-date, Microsoft is up 7.78% while the S&P 500 is up 13.50%. Over the past calendar year, Microsoft is up 12.50% while the S&P 500 is up 23.48%. When you look at three-year returns, Microsoft is up 35% while the S&P 500 is up 36.46%.

At $27.20, Microsoft is trading almost two dollars lower than its 50-day SMA of $29.04. It’s trading more than two dollars lower than its 100-day SMA of $29.60. It’s trading approximately three dollars lower than its 200-day moving average of $30.26.

Microsoft has always been a safe stock to own, and that remains the case today, but owning it is like being stuck in the mud.

E = Earnings Are Steady

Earnings and growth have been steady over the past five years. This trend should continue.

      2008       2009       2010       2011       2012
Revenue ($)in billions 60.42 58.44 62.48 69.94 73.72
Diluted EPS ($) 1.87 1.62 2.10 2.69 2.00

 

The quarterly numbers are also steady:

     9/2011      12/2011      3/2012      6/2012      9/2012
Revenue ($)in billions 17.37 20.88 17.41 18.06 16.01
Diluted EPS ($) .68 .78 .60 -.06 .53

 

T = Trends Support the Industry

Microsoft had become so infuriated with Google that…

it even launched it’s own site to bash Google. The site was called Scroogled.com, but it has since been shut down. That hasn’t stopped Microsoft from constantly throwing rocks at Google. Microsoft’s most recent complaint is search results for Google Shopping are based on paid advertising. Microsoft sees this as hypocritical since Google has always taken a stance against such practices. In reality, Microsoft needs to stop acting like a sore loser and realize this is business, not Morals 101.

Microsoft might be losing in search with their underrated Bing search engine, but they’re doing very well with Windows 8.

Conclusion

As long as Steve Ballmer is CEO, innovation will be limited. Windows 8 might bring results, but it’s not a product that excites the masses. That said, owning a breakeven stock that pays a nice dividend isn’t a bad idea. You could do a lot worse.

Based on all the factors listed above, Microsoft is a WAIT AND SEE.

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