Where Will Microsoft Go Next?

Microsoft windows Surafce RT

With shares of Microsoft (NASDAQ:MSFT) trading around $33, is the stock an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze it 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 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. As a mature company, Microsoft is also offering a stable dividend that is currently yielding around 2.74 percent annually.

T = Technicals on the Stock Chart are Strong

Microsoft stock has been part of a consistent range for most of the past decade. The stock is now trading near the top of this range, where it may see some resistance. Analyzing the price trend and its strength can be done using 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 from Thinkorswim below, Microsoft is trading near its rising key averages, which signal neutral to bullish price action in the near term.

MSFT

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

25.92%

83%

80%

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

Put IV Skew

Call IV Skew

July Options

Flat

Average

August Options

Flat

Average

As of Tuesday, 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 very significant amount of call and put option contracts, and are leaning neutral to bullish over the next two months.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. The last four quarterly earnings announcement reactions help gauge investor sentiment on Microsoft’s stock. What do the last four quarterly earnings and year-over-year revenue growth figures for Microsoft look like and, more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

20.00%

-2.56%

-22.06%

-108.70%

Revenue Growth (Y-O-Y)

17.71%

2.78%

-7.83%

3.97%

Earnings Reaction

3.36%

0.90%

-2.91%

-1.76%

Microsoft has seen mixed earnings and rising revenue figures in the past four quarters. From these numbers, the markets have been optimistic with Microsoft’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

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

Microsoft

Oracle

Apple

Google

Sector

Year-to-Date Return

25.61%

-10.02%

-24.53%

22.40%

10.13%

Microsoft has been a relative performance leader in the year to date.

Conclusion

Microsoft is a well-regarded company that provides software products and services to a large number of companies and consumers operating worldwide. The stock has been on a bullish run this year, but is now trading near the top of a multi-year range that may cause some trouble. Over the past four quarters, earnings have been mixed while revenues have been on the rise, leading to optimistic investors. Relative to its peers and sector, Microsoft has been a year-to-date performance leader. WAIT AND SEE what Microsoft does the remainder of this quarter.

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