With shares of Microsoft (NASDAQ:MSFT) trading around $28, 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:
C = Catalyst for a Stock’s Movement
Microsoft develops, licenses, and supports software products and services as well as designs and sells hardware worldwide. With the latest release of its operating system, Windows 8, Microsoft intends to increase its market share to levels that it previously had. Regardless, the company is just about present in any household of the developed world. As the technology and the world advance, look for Microsoft products to remain a staple in most homes, worldwide.
T = Technicals on the Stock Chart are Mixed
Microsoft’s long-term price chart shows how the stock saw a euphoric rise in the 1990s and then a period of consolidation over the last ten or so years. The stock has been subject to a downtrend lately, so further digestion in the stock may be needed. On a break above the downtrend, look for the stock to retest the top of the long-term trading range.
Key moving averages can provide valuable insight into the trend and strength of a trend. What are they key moving averages? The 50-day, 100-day, and 200-day simple moving averages. Microsoft stock is currently trading below and around its key averages which only signals a lack of trend. So, the stock may need a little more time to build constructive price action.
A relatively simple way to gain perspective into investor sentiment is through the use of the options market. More specifically, taking a look at the implied volatility and implied volatility skew levels of Microsoft options may help determine if investors are bullish, neutral, or bearish. The implied volatility of Microsoft options is at 21.45 percent today which coincides with a 70th percentile over the last 30 trading days and 54th percentile over the last 90 trading days. 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.
The implied volatility skew of March and April put and call options is at about average. Now, what does this mean? As of today, there is an average demand from call and put buyers or average supply of call and put sellers, all neutral over the next two months. So, investors are buying a significant amount of call and put option contracts and are leaning neutral over the next two months, possibly signaling further consolidation in Microsoft.
E = Earnings Are Mixed Quarter-Over-Quarter
Microsoft should be displaying increasing earnings and revenue growth so that the stock price has a positive catalyst. What do the last four quarterly earnings and revenue growth figures for Microsoft look like? The last four quarterly earnings growth (Y-O-Y) rates have been: -2.56, -22.06, -4.4, and -1.64 percent while the last four revenue growth (Y-O-Y) rates have all been: 2.73, -7.85, 3.98, and 5.96 percent. Microsoft has been struggling with its earnings and revenue growth rates, over the last four quarters.
More importantly, how did investors like these numbers? The last four quarterly earnings announcement reactions help gauge investor sentiment on Microsoft’s stock. The last four quarters have seen next trading session returns of 0.9, -2.9, -1.78, and 4.54 percent. Investors in Microsoft have had mixed emotions about most recent earnings reports.
E = Average Relative Performance Versus Peers and Sector
Microsoft is a profit machine, but how has the stock done relative to its peers and sector? Year-to-date, the stock is returning 2.64 percent while its competitors, Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), Oracle (NASDAQ:ORCL), and sector are returning -21.47, 15.95, 2.22, and 0.29 percent respectively. Microsoft’s year-to-date performance is mediocre relative to its peers and sector.
Microsoft is a leader in the growing software space. However, the stock price is ranging and may need a little more time to consolidate. Earnings and revenue growth figures have not been impressive and it has been reflected in its average year-to-date performance relative to its peers and sector. WAIT AND SEE how Microsoft’s latest software release performs.
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