Where Will Microsoft Go Next?

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.

Microsoft’s media chief, Blair Westlake, left the company after working on media partnerships for Microsoft’s Xbox platform for 10 years, Westlake confirmed to Variety on Wednesday. “It has become clear to me that the organization is moving in a direction that does not fit either my expertise or my skill sets,” Westlake said to the publication. Microsoft confirmed the departure with the Seattle Times. “We can confirm that Blair is leaving Microsoft after nearly ten years. We thank him for his contributions and wish him well in his new endeavors,” the company said in a statement shared with the newspaper. Westlake’s departure comes as Microsoft continues to simultaneously attempt to restructure itself and search for a new CEO.

T = Technicals on the Stock Chart Are Mixed

Microsoft stock has seen its fair share of volatility in the last couple of years. The stock is currently trading sideways and may need time to stabilize 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 signals 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

31.21%

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

February Options

Average

Average

March Options

Average

Average

As of Monday, there is average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very 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 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 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

-3.08%

11.94%

20%

-2.56%

Revenue Growth (Y-O-Y)

7.36%

10.17%

17.71%

2.78%

Earnings Reaction

5.96%

-10.85%

3.36%

0.9%

Microsoft has seen mixed earnings and increasing revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about Microsoft’s recent earnings announcements.

P = Average 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

-2.75%

-3.63%

-0.13%

2.66%

-1.96%

Microsoft has been an average relative performer, year to date.

Conclusion

Microsoft is a technology company that provides valuable software products and services to consumers and companies worldwide. The company’s media chief has left the company after working on media partnerships for Microsoft’s Xbox platform for 10 years. The stock has been moving higher in recent years but is currently trading sideways. Over the last four quarters, earnings have been mixed while revenues have been rising, which has produced mixed feelings among investors. Relative to its peers and sector, Microsoft has been an average year-to-date performer. WAIT AND SEE what Microsoft does this quarter.

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