Is Microsoft Undervalued?

With shares of Microsoft (NASDAQ:MSFT) trading around $28, 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 range of software products and services. The company also designs and sells hardware, and delivers online advertising to the customers. It operates in five segments: Windows & Windows Live Division, Server and Tools, Online Services Division, Microsoft Business Division, and Entertainment and Devices Division. Through its array of divisions, Microsoft is able to provide products and services to a wide range of consumers and businesses across different industries around the world.

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T = Technicals on the Stock Chart are Improving

Microsoft saw a monster run during the technology boom but has been in a decade long consolidation since then. The stock is currently attempting to head towards the top end of the long-term range. 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 untangling 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

24.69%

96%

93%

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

May Options

Steep

Average

June 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 significant 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?

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

-2.56%

-22.06%

-108.70%

-1.64%

Revenue Growth (Y-O-Y)

2.78%

-7.83%

3.97%

5.96%

Earnings Reaction

0.9%

-2.91%

-1.76%

4.54%

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Microsoft has seen a mixture of increasing and shrinking earnings and revenue over the last four quarters. From these figures, the markets have had mixed feelings about Microsoft’s last four earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Microsoft stock done relative to its peers, Oracle (NASDAQ:ORCL), Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), and sector?

Microsoft

Oracle

Apple

Google

Sector

Year-to-Date Return

4.05%

-2.41%

-21.13%

8.86%

-0.08%

Microsoft has been a year-to-date performance leader relative to its peers and sector.

Conclusion

Microsoft is an established company which provides products and services to consumers and businesses that have revolutionized industries across the globe. The stock looks to be headed towards the top end of its long-term range. Earnings and revenue figures have produced mixed feelings with investors as they have been growing and shrinking at unpredictable intervals. Relative to its peers and sector, Microsoft has been a performance leader. WAIT AND SEE what Microsoft does in the coming quarter.

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