Can Microsoft Continue to Outperform?

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 has released the latest sales numbers for the new Xbox One video game console, saying that it took 18 days for the device to sell more than 2 million units. The latest data again place the Xbox One neck and neck with Sony’s (NYSE:SNE) competing PlayStation 4. Last week, Sony released its sales figures for the new PlayStation, and as of December 1, the company had sold 2.1 million consoles. “We continue to be humbled and overwhelmed by the positive response from our fans. We are thrilled to see sales of Xbox One on a record-setting pace, with over 2 million Xbox One consoles in homes around the world. Demand is exceeding supply in our 13 launch markets and Xbox One is sold out at most retailers,” said Yusuf Mehdi, Xbox’s corporate vice president of strategy and marketing, in the company’s announcement.

T = Technicals on the Stock Chart Are Strong

Microsoft stock has seen its fair share of volatility in the last couple of years. The stock is currently trading sideways and may need time to consolidate before heading higher. 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

29.52%

93%

90%

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

Put IV Skew

Call IV Skew

December Options

Flat

Average

January 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 very 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?

2013 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

-3.08%

11.94%

20.00%

-2.56%

Revenue Growth (Y-O-Y)

7.36%

10.17%

17.71%

2.78%

Earnings Reaction

5.96%

-10.85%

3.36%

0.90%

Microsoft has seen mixed 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), Google (NASDAQ:GOOG), and sector?

Microsoft

Apple

Oracle

Google

Sector

Year-to-Date Return

39.68%

6.07%

7.86%

57.34%

28.73%

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 released the latest sales numbers for the new Xbox One video game console, saying that it took 18 days for the device to sell more than 2 million units. The stock has been moving higher in recent years, but is now trading sideways. Over the last four quarters, earnings have been mixed while revenues have been rising which has left investors pleased about the company. Relative to its peers and sector, Microsoft has been a year-to-date performance leader. Look for Microsoft to OUTPERFORM.

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