Is Microsoft Poised to See Rising Prices?

With shares of Microsoft (NASDAQ:MSFT) trading around $32, 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 2.92 percent annually.

Microsoft should count founder Bill Gates out as a possible replacement for CEO Steve Ballmer, who made the surprise announcement last month that he’ll leave Microsoft sometime in the next year. Gates has said he’s not interested in working at Microsoft full-time, as running his charity foundation is his full-time job, according to an interview with Business Insider. Ford (NYSE:F) CEO Alan Mulally and Computer Sciences (NYSE:CS) CEO Mark Lawrie are rumored to be at the top of Microsoft’s CEO wish list.

T = Technicals on the Stock Chart Are Mixed

Microsoft stock has struggled to make new highs in the last several years. The stock has been fairly volatile this year and is currently trading near mid-prices for the year. 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 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

22.62%

6%

5%

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

Put IV Skew

Call IV Skew

October Options

Steep

Average

November Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral to bearish 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 had conflicting 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

22.43%

-9.20%

2.01%

24.57%

17.37%

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. Bill Gates has ruled-out becoming the company’s CEO and it is rumored that Computer Sciences and Ford’s current CEOs are at the top of the list. The stock has struggled to make new highs and is currently trading near mid-prices for the year. Over the last four quarters, earnings have been mixed while revenues have been rising which have produced conflicting feelings among investors. Relative to its peers and sector, Microsoft has been a year-to-date performance leader. WAIT AND SEE what Microsoft does this quarter.

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