Is Microsoft Poised to Head Higher?

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, the world’s biggest software maker, is among companies embroiled in a European Union inquiry into Luxembourg’s tax treatment of multinational firms, according to three people familiar with the EU’s review. The European Commission has quizzed Luxembourg about how it taxes Microsoft’s intellectual property, said one of the people, who asked not to be identified because the matter is private. Competition regulators also asked questions about McDonald’s (NYSE:MCD) taxes in Luxembourg, two of the people said. Amazon’s (NASDAQ:AMZN) tax affairs there are also being looked at, the Financial Times reported yesterday, citing an EU official. Amid a global crackdown on tax avoidance, EU competition regulators last month opened a probe into suspected tax breaks for Apple (NASDAQ:AAPL) in Ireland, Starbucks (NASDAQ:SBUX) in the Netherlands and Fiat Finance & Trade SA in Luxembourg, the bloc’s richest country in per capita terms.

“We are in constant contact with the European Commission on all these tax issues and Luxembourg is pretty confident in the way it handles its taxation issues and so we’re going to monitor the information with the commission and hand over the information that is requested,” Pierre Gramegna, Luxembourg Finance Minister, said on CNBC. The scrutiny of Luxembourg is also a potential embarrassment for Jean-Claude Juncker, who is primed to become the next president of the commission — the EU’s executive arm in charge of the investigation. Juncker, who led Luxembourg until last year, helped the country win a reputation as an attractive location for international companies.

“The commission continues to gather information about certain tax practices in several member states,” Antoine Colombani, spokesman for Competition Commissioner Joaquin Almunia, said. “However we will not make any comment on whether specific companies may or may not be covered by this information gathering exercise.” Sabina Gockel, a spokeswoman for Microsoft in Brussels, declined to comment.

T = Technicals on the Stock Chart are Strong

Microsoft stock has been trending higher over the last couple of years. The stock is currently trading near all time highs 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 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

20.09%

96%

94%

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

August Options

Flat

Average

September 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 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.