Is Microsoft Well-Positioned for the Future?

With shares of Microsoft (NASDAQ:MSFT) trading around $36, 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.

After compiling a list of more than 100 CEO candidates, Microsoft settled on Satya Nadella a home-grown leader who joined the software maker in the early 1990s. That’s back when Google’s founders were teenagers and Facebook CEO Mark Zuckerberg was in elementary school. Tuesday’s hiring of Nadella as Microsoft’s CEO after a five-month search is a safe move that’s likely to be greeted with sighs of relief around the company’s Redmond, Washington headquarters, industry analysts say. But the methodical, almost predictable decision is likely to reinforce perceptions that Microsoft is a plodding company reluctant to take risks as it competes against younger rivals who relish going out on a limb.

While Google founder and CEO Larry Page boasts about his company taking “moon shots” and Zuckerberg promises to “move fast and break things,” Microsoft has fallen behind the technological curve after underestimating the importance of Internet search more than a decade ago and reacting too slowly to the rise of mobile devices during the past seven years. Meanwhile, the sales of personal computers running on Microsoft’s Windows software are shrinking.

T = Technicals on the Stock Chart Are Mixed

Microsoft stock has seen its fair share of volatility over the last several years. The stock is currently pulling back and may need time to consolidate before heading higher. 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 rising key averages which signal neutral 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

26.90%

53%

51%

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

Put IV Skew

Call IV Skew

March Options

Average

Average

April Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral 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%

20.00%

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 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), Google (NASDAQ:GOOG), and sector?

Microsoft

Apple

Oracle

Google

Sector

Year-to-Date Return

-3.18%

-8.30%

-5.38%

2.54%

-2.58%

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 on Tuesday announced Satya Nadella as its new CEO. The stock has been moving higher in recent years, but is currently pulling back. Over the last four quarters, earnings and revenues have been rising. However, investors have had mixed feelings 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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