Monday, September 22, 2014

* Microsoft (MSFT) - Stock Booms and May Keep Booming (One-Chart)

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MSFT is trading $47.08, down 0.9% with IV30™ up 7.2%. The Symbol Summary is included below.

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As the bull market runs, most eyes are focused on technology, and for good reason. The XLK Technology Select SPDR is up 13% YTD while the S&P 500 is up 9% and the Russell 2000 Small Cap Index is down 2%.

While there a group of stocks that are the largest creators of news and headlines, one company gets fewer headlines but is vastly outperforming all three of the benchmarks listed above. This “quiet giant” is Microsoft (MSFT), up 25% YTD, and breaking annual highs nearly every week.

In a broader article soon to be published on BUSINESS INSIDER, I'll provide six visualizations which illustrate the impressive run in MSFT, and one-chart which may be the best (and most sensible) reflection of valuation we could hope for. For now, I can share this chart, which is quite powerful.

Asset Growth (1-year) vs Gross Margin %
Here’s an image which plots MSFT vs. peers with gross margin % on the y-axis and total asset growth (one-year) on the x-axis. Note that MSFT is in the upper right hand quadrant, or in English, it has both higher gross margin % and asset growth than any peer.

Click for Full Size Image

Potential Reasons for Bullish Optimism in Microsoft
While AAPL grabs the headlines, the iPhone's monumental and unprecedented success has been so remarkable that AAPL is now predominantly a cell-phone company. MSFT has not had that singular market changing success, but it has a lot of other dishes in the oven. The three most compelling to me are:

* Gaming revenue is up nearly 50% year-over year to just under $10B including a partnership with Electronic Arts and Microsoft’s Xbox.

* Business spending could increase and that’s Microsoft’s bread and butter whether it be software of cloud computing licenses.

* OK, I had to say it… smart phone and tablet growth. The market is essentially pricing in little to no market penetration, but what if there is? What if Surface, for example, does become the tablet of choice? It’s a free call option that you own with MSFT stock.

This is trade analysis, not a recommendation.

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