Microsoft is the New Tech Highflier

Lost in the stock market route on Friday was that Microsoft produced better than expected results and could continue to move higher despite the pressure on equity bourses.  The question for equity investors is whether the numbers are already baked into MSFT share price.

The release of Microsoft’s earnings revealed that four of the five segments came in towards the top end of the range, with the device and consumer hardware segment blowing past estimates. This was the main reason for the pop in the stock price, but unfortunately, the hardware segment is one of the lower margin ones. The company blew past earnings per share estimates, coming in at $0.78 versus expectations for $0.68. The pressure release reported by the company showed the segment breakdown.

Surface revenue more than doubled sequentially, from $400 million in the first quarter to $893 million in the second quarter. The company sold 7.4 million Xbox console units into the retail channel, including 3.9 million Xbox One consoles and 3.5 million Xbox 360 consoles.Commercial cloud services revenue more than doubled.Office 365 commercial seats and Azure customers both grew triple-digits.

One of the weaker spots in the earnings report was the company’s earning guidance. Microsoft guided to revenues of $20 to $20.5 billion, and analysts were looking for $20.47 billion. Since Microsoft has beaten estimates handily in the past two quarters, some might see the guidance as conservative.

There are a number of issues that are keeping the stock price down that investors should be aware of.  First the search for a new CEO is keeping some investors away from MSFT.  Additionally, Microsoft has spent $5.5 billion on share repurchases in the last calendar year down from 8.374 billion to 8.300 billion, and it was basically flat during the previous calendar year. Microsoft is buying back a large dollar amount worth of stock, but executive options and other dilutive securities are hurting the program.

The stock price was able to hold the 50-day moving average after gapping higher on Friday.  Resistance is seen near the current highs at 37.70.  Momentum is positive with the MACD (moving average convergence divergence) index generating a buy signal as the spread (the 12-day moving average minus the 26-day moving average) crossed above the 9-day moving average of the spread.  The RSI on MSFT is printing near 53, which is in the middle of the neutral range.