Is Microsoft a Buy At These Prices?

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 is narrowing down its list of possible candidates for CEO. The list is down to five possible candidates; former Nokia (NYSE:NOK) CEO Stephen Elop, Ford (NYSE:F) CEO Alan Mulally, former Skype CEO Tony Bates, and enterprise/cloud software chief Satya Nadella. The sources who spoke to Reuters didn’t name the fifth person still in the running. Sources said Microsoft’s search could take a few more months despite the shortened list. Current Microsoft CEO Steven Ballmer is set to retire by August.

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 at all time highs and looks set to continue. 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

22.53%

23%

21%

What does this mean? This means that investors or traders are buying a small 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 small 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 optimistic 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

41.09%

-2.47%

1.89%

44.35%

22.21%

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 is looking for a new CEO with the current CEO set to retire by August. The stock has been moving higher in recent years and is now trading at all time highs. Over the last four quarters, earnings have been mixed while revenues have been rising which has left investors optimistic 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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