Microsoft Heads Up Into Earnings - Can Shares Follow Through?

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Microsoft Corporation MSFT shares head into Thursday evening's earnings report on an up note after holding up above trendline support last week. However, technical resistance looms just ahead for Microsoft.

So, who will win out in this battle between the bulls and the bears in one of the great mega-caps in the U.S. markets?

Related Link: Will Microsoft Have A Better Quarter Than Intel?

The Fundamental Bulls See

  • Still attractive profit margins north of 25 percent.
  • Massive levered free cash flow of $23.74 billion annually.
  • A nearly perfect balance sheet: $85 billion in cash versus only $23 billion in debt, debt-to-equity of only 25.86 percent and a current ratio of 2.5
  • A Treasury-beating dividend rate of 2.8 percent.
  • Attractive valuations for a mega-cap: A price-to-earnings of around 15 versus estimated EPS growth of 17 percent for 2015 and a price-to-sales ratio of 4.21.

But The Bears' See The Following Issues

  • Rich valuation metrics: The market capitalization of $369 billion trumps the enterprise value of $304 billion, the price-to-book is 4.07 and the P/E doesn't seem so cheap when compared to 7 percent revenue growth.

Technical Take

Technicians note that during the recent market selloff Microsoft came down and tested the first of three uptrend lines near $42.25-$42.50. The bounce since then has been right in line with the bounce that has occurred in the broader market. With horizontal line resistance just ahead at $45.42, the real work for Microsoft is about to begin. If that resistance is broken, then a run up to $47.57 is next for the bulls.

On the other hand, if the first uptrend line support is broken, a quick fall down to $40 could occur, where the second uptrend line comes into play.

The stock is a leader for the market, but there still is a question as to whether the broader market rally is destined to hold or fail.

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