Will Microsoft Regain Strength?

With shares of Microsoft (NASDAQ:MSFT) trading around $33, 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 reportedly hoping to find a replacement for CEO Steve Ballmer by the end of the year. People familiar with the matter who spoke to Bloomberg said that Microsoft’s board is narrowing down its list of possible candidates. Favorites include Ford (NYSE:F) CEO Alan Mulally; Nokia (NYSE:NOK) CEO Stephen Elop, who will begin working at Microsoft when the acquisition of Nokia’s handset business is completed; and Microsoft executives Paul Mauritz and Tony Bates. The time at which a new CEO could start depends on negotiations over compensation and arranging to leave their respective companies, Bloomberg’s sources said.

T = Technicals on the Stock Chart Are Mixed

Microsoft stock has witnessed significant movement this year but is still trading within a multiyear range. The stock is currently chugging higher as it attempts to retest highs 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 signals neutral price action in the near term.

MSFT

Source: Thinkorswim

Taking a look at the implied volatility 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

28.21%

86%

84%

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

October Options

Flat

Average

November Options

Flat

Average

As of Thursday, there is 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. 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), and Google (NASDAQ:GOOG) — and sector?

Microsoft

Apple

Oracle

Google

Sector

Year-to-Date Return

25.20%

-7.58%

-1.92%

22.60%

9.58%

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 reportedly hoping to find a replacement for current CEO Steve Ballmer. The stock has experienced a good amount of volatility this year but looks to be attempting to retest this year’s highs. Over the last four quarters, earnings have been mixed while revenues have been rising, which has produced conflicting feelings among investors about recent earnings announcements. Relative to its peers and sector, Microsoft has been a year-to-date performance leader. Look for Microsoft to OUTPERFORM.

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