Does Microsoft Belong in Your Portfolio?

With shares of Microsoft (NASDAQ:MSFT) trading around $41, 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’s Office suite of software for Apple’s (NASDAQ:AAPL) iPad quickly rocketed to the top of the App Store’s charts soon after being released on Thursday. As reported by Apple Insider, Microsoft Word for iPad, Microsoft Excel for iPad, and Microsoft PowerPoint for iPad have secured the first-, second-, and third-highest spots, respectively, on the free iPad apps chart. The Office for iPad apps also had a beneficial spillover effect on Microsoft’s other apps, with the recently redesigned Microsoft OneNote for iPad moving up to the No. 4 spot.

The Office 365 subscription is available as an in-app purchase or can be bought directly from Microsoft, outside of the app. In-app Office 365 subscriptions are available for $9.99 per month or $99 per year. According to Re/code, an Apple spokesperson confirmed that it is taking a standard 30 percent cut of Microsoft’s in-app Office 365 subscription sales. This arrangement allows Apple to benefit from the sales of one of its major software rivals.

T = Technicals on the Stock Chart Are Strong

Microsoft stock has been moving higher in recent times. The stock is currently trading near highs for the year and looks poised to continue. 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 signals 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

23.76%

93%

90%

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

April Options

Flat

Average

May Options

Flat

Average

As of Tuesday, 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.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

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 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

2.63%

-3.08%

11.94%

20%

Revenue Growth (Y-O-Y)

14.26%

7.36%

10.17%

17.71%

Earnings Reaction

2.05%

5.96%

-10.85%

3.36%

Microsoft has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with 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

10.45%

-3.86%

9.10%

1.19%

5.22%

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’s Office suite of software for Apple’s iPad quickly rocketed to the top of the App Store’s charts soon after being released on Thursday. The stock has been moving higher in recent years and is currently trading near highs for the year. Over the last four quarters, earnings and revenues have been rising, which has pleased investors in the company. Relative to its peers and sector, Microsoft has been a relative year-to-date performance leader. Look for Microsoft to OUTPERFORM.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

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