Can Microsoft Surge Higher?

With shares of Microsoft (NASDAQ:MSFT) trading around $40, 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.

China is home to nearly half a billion gamers who spent $13 billion on the hobby in the past year alone. That’s a sizable chunk of the world’s population and an enormous market by any estimation. But for the past 14 years, the Chinese government has blocked foreign game consoles from being sold in the country, leaving Microsoft, Sony (NYSE:SNE), and Nintendo (NTDOY.PK) out in the cold. Meanwhile, it’s been PC, mobile, and online games that have vacuumed up all of the profits. That’s about to change. Earlier this year, China said that it would lift the console ban and allow foreign console makers to sell their wares in the country as long as they work with a local partner and operate out of the Shanghai Free-Trade Zone.

Microsoft announced on Tuesday that it plans to do just that. The company has partnered with BesTV and is going to release the Xbox One in China in September. In an announcement, Yusuf Mehdi, the corporate vice president of marketing and strategy for Microsoft’s devices and studios, said, “Launching Xbox One in China is a significant milestone for us and for the industry, and it’s a step forward in our vision to deliver the best games and entertainment experiences to more fans around the world.”

T = Technicals on the Stock Chart Are Mixed

Microsoft stock has been moving higher in recent times. However, the stock is currently pulling back and may need time to stabilize. 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

20.51%

0%

0%

What does this mean? This means that investors or traders are buying a very small 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 very 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?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

-5.56%

2.63%

-3.08%

11.94%

Revenue Growth (Y-O-Y)

-0.44%

14.26%

7.36%

10.17%

Earnings Reaction

0.12%

2.09%

5.96%

-10.85%

Microsoft has seen mixed earnings and increasing 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), Google (NASDAQ:GOOG), and sector?

Microsoft

Apple

Oracle

Google

Sector

Year-to-Date Return

11.76%

6.88%

8.03%

-5.22%

6.36%

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 has partnered with BesTV and is going to release the Xbox One in China in September. The stock has been moving higher in recent years, but is currently pulling back. Over the last four quarters, earnings have been mixed while revenues have been increasing, which has left investors pleased about recent earnings announcements. Relative to its peers and sector, Microsoft has been a relative year-to-date performance leader. Look for Microsoft to OUTPERFORM.

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