Will Microsoft Stock Trend Higher?

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With shares of Microsoft (NASDAQ:MSFT) trading around $33, 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 founder Bill Gates is being called upon to resign as chairman by three of Microsoft’s 20 biggest shareholders, according to people familiar with the matter who spoke to Reuters. While CEO Steven Ballmer has been criticized for years for his inability to improve the company’s performance, this is the first time shareholders have come out and criticized Gates himself, who remains a highly respected figure in the tech industry, Reuters reports. The three investors believe that Gates’s presence will prevent a new CEO from making the substantial changes Microsoft needs.

T = Technicals on the Stock Chart Are Strong

Microsoft stock has made some positive progress in the last year or so. However, after a bull run earlier in the year, the stock has been trading sideways as it digests news. 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 slilghtly 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

24.33%

36%

35%

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

Put IV Skew

Call IV Skew

October Options

Flat

Average

November 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 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?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

11.94%

20.00%

-2.56%

-22.06%

Revenue Growth (Y-O-Y)

10.17%

17.71%

2.78%

-7.83%

Earnings Reaction

-10.85%

3.36%

0.90%

-2.91%

Microsoft has seen mixed earnings and rising revenue figures over the last four quarters. From these numbers, the markets have had conflicting 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

26.75%

-7.77%

0.93%

25.18%

18.14%

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. Three of Microsoft’s largest shareholders are calling on Bill Gates to resign. The stock has made some progress recently but is now trading in a consolidation range. Over the last four quarters, earnings have been mixed while revenues have been rising which has produced conflicting feelings about recent earnings announcements among investors. Relative to its peers and sector, Microsoft has been a year-to-date performance leader. WAIT AND SEE what Microsoft does this coming quarter.

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