Will Microsoft Continue This Bullish Run?

With shares of Microsoft (NASDAQ:MSFT) trading around $35, 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 reported that earnings in the third quarter rose 17 percent from the year ago period, wildly beating out analyst expectations and causing a flurry of after-hours trading in the company's shares. Steve Ballmer, the CEO of Microsoft, said that he is happy that there is a lot of consumer excitement over products such as the Xbox 1 and Surface 2, which could help boost the company's sales looking ahead to the holiday season. The company's stock has risen about 6 percent before the opening bell.

T = Technicals on the Stock Chart Are Strong

Microsoft stock has seen its fair share of volatility in the last couple of years. The stock is currently trading near the high end of its yearly range and looks set 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.

(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	21.64%	0%	0%

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

	Put IV Skew	Call IV Skew
November Options	Flat	Average
December 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 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 Increasing 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%	20.00%	-2.56%
Revenue Growth (Y-O-Y)	7.36%	10.17%	17.71%	2.78%
Earnings Reaction	6.46%*	-10.85%	3.36%	0.90%

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

* As of this writing

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	34.82%	-0.35%	-0.29%	44.40%	20.64%

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. A recent earnings report has investors buzzing about the company. The stock has been moving higher in recent years and is now trading near highs for the year. Over the last four quarters, earnings have been mixed while revenues have been rising which has left investors optimistic about the company. Relative to its peers and sector, Microsoft has been a year-to-date performance leader. Look for Microsoft to OUTPERFORM.