Microsoft is Down as Windows Phone Sales Fall

Microsoft is Down as Windows Phone Sales Fall
February 18, 2016

The shares of Microsoft Corporation (NASDAQ:MSFT), the American multi-national software company, has appreciated by about 20% in the past year. This is a stunning performance, as most of the companies in the tech sector are hardly up by 5%, and stems from the success it currently experiences in the cloud computing business.

Fundamentally, the company is trying to rely less on revenue associated with PCs and it seems working for now. The cloud business rose 8% to $5.9 billion in the second quarter of fiscal 2016. For the second quarter of fiscal 2016, the company reported net income of $6.7 billion or $0.78 per share on revenue of $25.7 billion and beat analysts’ estimates.

During the second quarter, Microsoft’s Surface line of 2-in-1 Windows 10 hybrid devices registered revenue of $1.352 billion against $672 million in the first quarter of fiscal 2016. As far as gaming is concerned, Xbox live monthly active users grew 30% on a year-on-year basis to 48 million. Furthermore, Office 365 revenues grew 70%, while Office 365 consumer/subscriber numbers increased to 20.6 million in the second quarter of fiscal 2016. Thus, some traders claim that Microsoft is going cheap considering a forward looking PE of about 17.

However, not all is well as far as the software giant is concerned. In the second-quarter, Windows phone sales were 4.5 million units, down 57% from 10.5 million units in the second quarter of fiscal 2015. Similarly, Windows OEM (Original Equipment Manufacturer) revenue declined 5% in constant currency. If smart phones and tablets are considered as computing devices, then the percentage share of Windows based computers have gone down to 11% from a high of 90% almost a decade prior. It shows the competition currently faced by the tech giant.

For the fiscal 2015, the operating margin had come down to 19.4% from a high of 32% in the fiscal 2014. The net income for the year 2015 had declined to $12.19 billion from $22.07 billion in the year 2014. For fiscal 2015, the return on equity had fallen to 14.36% from a high of 26.17% in the year 2014. The operating cash flow growth is a negative 9.78% for the year 2015, compared to 11.79% in the year 2014. The ratio of price to book value currently stands at 5.2, while the S&P and industry’s average is 2.5 and 4 respectively.

It certainly seems that the senior management has successfully shaken things up. It looks like the company had finally managed to tilt the balance sheet in their favor. However, it is too early to claim that Microsoft had succeeded in a turnaround. It may take several quarters before the stock starts rallying.

Technically, as shown in the image below, the stock had fallen below its 50-day moving average. Major resistance exists at 55-levels. A decline below 47-level can be expected in the coming weeks.

Technical Analysis of Microsoft - 18th February 2016

The selling pressure would likely take the stock to its next major support at 44-levels. Thus, a binary options trader can purchase a put option with March end expiry. The suggested strike price for the put option is 45.


Andrew Wright

Prior to founding in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.

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