Will Microsoft See a Boost From a Reorganization?

With shares of Microsoft (NASDAQ:MSFT) trading around $34, 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 & Windows Live Division, Server and Tools, Online Services Division, Microsoft Business Division, and Entertainment and Devices Division. As a mature company, Microsoft is also offering a stable dividend that is currently yielding around 2.67 percent annually.

Microsoft will reportedly release details about its reorganization this coming Thursday. Analysts are expecting CEO Steven Ballmer to gather the company’s focus around software and devices for consumers and businesses. Many of the company’s top executives are expected to be shuffled around, although it doesn’t seem as though a successor for Ballmer is yet in place. Through its array of divisions and known reorganization, Microsoft will be able to provide products and services to a wide range of consumers and businesses across different industries worldwide.

T = Technicals on the Stock Chart are Strong

Microsoft stock has been on a powerful move higher over the last couple of years. The stock is now consolidating a bit after such an impressive run so it may need a little more time before its next move. 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 slightly above its rising 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

24.30%

36%

33%

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

Put IV Skew

Call IV Skew

July Options

Flat

Average

August Options

Flat

Average

As of today, 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 small amount of call and put option contracts and are leaning neutral to bullish 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 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 over the last 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 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

28.44%

-5.60%

-21.26%

27.85%

12.58%

Microsoft has been a relative performance leader, year-to-date.

Conclusion

Microsoft is a software giant that will soon see a reorganization in hopes of increasing their competitiveness. The stock has been on a strong path to higher prices but is now digesting recent gains. Over the last four quarters, earnings have been mixed while revenue figures have been on the rise which have maintained investors optimistic about the company. Relative to its peers and sector, Microsoft has been a year-to-date performance leader. Look for Microsoft to continue to OUTPERFORM.

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