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 range of software products and services. The company also designs and sells hardware, and delivers online advertising to the customers. It operates in five segments: Windows & Windows Live Division, Server and Tools, Online Services Division, Microsoft Business Division, and Entertainment and Devices Division. Through its array of divisions, Microsoft is able to provide products and services to a wide range of consumers and businesses across different industries around the world. As a mature company, Microsoft is also offering a stable dividend that is currently yielding around 2.74% annually.
T = Technicals on the Stock Chart are Strong
Microsoft stock has traded in a fairly consistent range extending back to the early 2000s. The stock is now near the top-end of its range but seems to be rejecting those prices. 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 slightly above its rising key averages which signal neutral to bullish price action in the near-term.
(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 | 26.06% | 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 | |
| July Options | Flat | Average |
| August 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.
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 Q1 | 2012 Q4 | 2012 Q3 | 2012 Q2 | |
| Earnings Growth (Y-O-Y) | 20.00% | -2.56% | -22.06% | -108.70% |
| Revenue Growth (Y-O-Y) | 17.71% | 2.78% | -7.83% | 3.97% |
| Earnings Reaction | 3.36% | 0.90% | -2.91% | -1.76% |
Microsoft has seen decreasing earnings and rising revenue figures over the last four quarters. From these numbers, the markets have been happy 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 | | Sector | |
| Year-to-Date Return | 25.72% | -21.37% | -0.48% | 25.39% | 14.88% |
Microsoft has been a relative performance leader, year-to-date.
Conclusion
Microsoft provides innovative, valuable, and essential software products and services to consumers and companies all across the globe. The stock has been part of a steady range extending back to the early 2000s and is now at the top-end of this range. With the stock rejecting these prices, look for the divided yield to only become juicier. Over the last four quarters, earnings have decreased while revenues have increased which has kept investors in the company generally happy. 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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