Can Microsoft Surge Higher?

With shares of Microsoft (NASDAQ:MSFT) trading around $36, 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 sold more than 3 million units of Xbox One since the launching of the game console in 13 countries last November 22. “It’s been incredible to see Xbox One selling at a record-setting pace for Xbox, and we were honored to see Xbox One become the fastest-selling console in the U.S. during our launch month in November,” said Yusuf Mehdi, Microsoft’s corporate vice president of Marketing, Strategy and Business, Xbox. Mehdi added that the demand for Xbox One has been strong, and the game console was selling out during the holiday shopping season in many retailers worldwide. According to him, the company is working hard to ship additional consoles to retailers as soon as possible.

T = Technicals on the Stock Chart Are Mixed

Microsoft stock has seen its fair share of volatility in the last couple of years. The stock is currently pulling back 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 between its rising key averages, which signal neutral 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

26.67%

60%

58%

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

February Options

Average

Average

March Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral 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 = 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

-2.48%

-2.78%

-0.55%

2.29%

-1.88%

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

Conclusion

Microsoft is a technology company that provides valuable software products and services to consumers and companies worldwide. The company sold more than 3 million units of Xbox One since the launching of the game console in 13 countries last November 22. The stock has been moving higher in recent years, but is currently pulling back. 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 an average year-to-date performer. WAIT AND SEE what Microsoft does this quarter.

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