Will This Tech Titanic Continue Rewarding Shareholders?

With shares of Microsoft (NASDAQ:MSFT) trading around $32.69, 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. Microsoft’s products include operating systems for personal computers, servers, phones, and other intelligent devices; server applications for distributed computing environments; productivity applications; business solution applications; desktop and server management tools. As software and hardware products continue to see explosive advancement, technology bellwethers like Microsoft are poised to see reasonable growth. Companies, economies, and populations worldwide are expanding and adopting Microsoft’s products at an increasing rate which leads to rising profits ahead.

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T = Technicals on the Stock Chart are Strong

Microsoft stock has part of a long-term value range but it may be getting ready to cruise higher. The stock has seen an explosive move higher recently due to a very positive earnings report. 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 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

22.52%

43%

39%

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

Put IV Skew

Call IV Skew

June Options

Flat

Average

July 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 good 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%

-108.52%

Revenue Growth (Y-O-Y)

17.71%

2.73%

-7.85%

3.98%

Earnings Reaction

3.36%

0.9%

-2.91%

-1.76%

Microsoft has seen mixed earnings and revenue figures over the last four quarters. From these figures, the markets have been very excited about Microsoft’s recent earnings announcements.

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P = Excellent Relative Performance Versus Peers and Sector

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

Microsoft

Apple

Google

Oracle

Sector

Year-to-Date Return

23.96%

-12.85%

23.05%

-0.27%

10.41%

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

Conclusion

Microsoft provides highly demanded software and hardware products to a wide range of consumers and companies operating in an array of industries worldwide. The stock has been part of a long-term range for quite a while now but has recently made a strong move towards higher prices. Earnings and revenue figures have shows mixed signs of growth, over the last four quarters, however, investors have been very excited about the most recent announcement. Relative to its peers and sector, Microsoft has been a year-to-date performance leader. Look for Microsoft stock to continue to OUTPERFORM.

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