How Will Microsoft Perform After Recent News?

With shares of Microsoft (NASDAQ:MSFT) trading around $34, 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 & Windows Live Division, Server and Tools, Online Services Division, Microsoft Business Division, and the Entertainment and Devices Division. As a mature company, Microsoft is also offering a stable dividend, which is currently yielding around 2.92 percent annually.

On Friday, current CEO Steven Ballmer, who took over the company in 2000 from Bill Gates, announced that he will retire from Microsoft within the next year. A special committee of the board of directors is said to be considering both internal and external candidates and has also brought-on an executive search firm to help find a  replacement.

In the last few weeks, Microsoft posted disappointing earnings, which some think is a sign that the slump in PC sales has caught up with the company. Microsoft hasn’t been able to successfully plant themselves in mobile computing just yet, and suffered significant charges for unsold Surface tablets. As it undergoes a major reorganization, look for Microsoft continue to be able to provide valuable products and services. However, investors may need time to digest the recent disappointing earnings report.

T = Technicals on the Stock Chart are Strong

Microsoft stock was surging higher earlier this year. However, since posting new highs, the stock has whipsawed up and and down as it digests recent news. 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

23.90%

53%

50%

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

September Options

Flat

Average

October 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 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 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

11.94%

20.00%

-2.56%

-22.06%

Revenue Growth (Y-O-Y)

10.17%

17.71%

2.78%

-7.83%

Earnings Reaction

-10.85%

3.36%

0.90%

-2.91%

Microsoft has seen mixed earnings and rising revenue figures over the last four quarters. From these numbers, the markets have been had mixed feelings about 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

29.11%

-5.81%

-3.98%

23.14%

18.93%

Microsoft has been a relative performance leader, year-to-date.

Conclusion

Microsoft is a technology bellwether that provides valuable software products and services to consumers and companies worldwide. Investors have a good amount of news to digest as current CEO Steven Ballmer is set to retire within the next year, the company is undergoing a reorganization, and recent earnings were not what investors expected. The stock has whipsawed as the markets attempt to digest recent headlines. Over the last four quarters, investors in the company have had mixed feelings as earnings have been mixed while revenues have been rising. Relative to its peers and sector, Microsoft has been a year-to-date performance leader. WAIT AND SEE what Microsoft does this coming quarter.

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.