Will Microsoft See a Benefit from Its Recent Purchase?

With shares of Microsoft (NASDAQ:MSFT) trading around $31, 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 agreed to purchase Nokia’s (NYSE:NOK) mobile phone unit, patents, and mapping services for a total of $7.2 billion. Nokia’s phones already use Microsoft’s Windows Phone software. The company’s Canadian head, Stephen Elop, will lead Microsoft’s mobile devices unit, and his name has even been tossed around as a possible replacement for retiring Microsoft CEO Steven Ballmer. Nokia used to dominate the mobile phone market, but has since fallen far behind rivals Apple (NASDAQ:AAPL) and Samsung in the highly competitive market.

T = Technicals on the Stock Chart Are Mixed

Microsoft stock has been fairly volatile in the past several months. The stock is currently trading down near breakout levels, so it may need some time to settle. 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

28.28%

76%

75%

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 past 30 and 90 trading days.

Put IV Skew

Call IV Skew

September Options

Steep

Average

October Options

Steep

Average

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

E = Earnings Are Increasing 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 mixed 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

19.43%

-6.71%

-3.21%

22.02%

15.64%

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 said it is purchasing Nokia’s mobile unit for $7.2 billion. The stock has whipsawed in the past several months, so it may need time to stabilize. Over the last four quarters, investors in the company have had mixed feelings — earnings have been mixed while revenues have been rising. Relative to its peers and sector, Microsoft has been a year-to-date performance leader. WAIT AND SEE what Microsoft does this coming quarter.

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