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Microsoft (NASDAQ:MSFT) reports fiscal third quarter earnings on Thursday, April 28th, after market close. The whisper number is $0.58, two cents ahead of the analysts estimates. Microsoft has exceeded the whisper number in 28 of the 50 earnings reports we have data.

Trading on an earnings event requires an understanding of post earnings price movement, both after hours and intra-day. We'll take a look at the average post earnings price movement, when those moves occur, and if Microsoft presents an earnings trade opportunity.

Since Microsoft reports earnings after market close, it's important to look at after hours trading activity. Over the past four quarters the average price move in after hours trading following their earnings reports is +0.6%, a very limited but positive price move. In other words if you took a long position prior to the past four earnings reports you were on the right side of the trade in two out of four trades.

The average price move during next available intra-day trading (market open to market close) for the past four quarters is -1.6%. A limited and negative price move. The average price move within five trading days for the past four quarters following their earnings reports is -3.2%. Another negative average price move.

Longer term earnings analysis (last four years of earnings) shows the company tends to see (on average) price movement of -1.3% (intra-day) in one trading day following their earnings report, and price movement of -0.8% in five trading days.

Microsoft has topped the whisper number in the past four quarters, but short term they've lacked a consistent price reaction. In other words, beating the whisper number doesn't always translate to price strength. Although they've topped the whisper number in the past six out of eight quarters, the short term price reaction has been positive in only one of the reports. In the comparable quarter last year, Microsoft topped the whisper number by one cent. The stock lost 0.8% in after hours trading, proceeded to drop another 0.5% during intra-day trading, and fell 26% over the next two and a half months.

Microsoft can be considered a contrarian play when trading earnings. In others words the company tends to see weakness when it tops the whisper, and strength when it misses the whisper in seven out of ten earnings reports.

Other factors that may influence post earnings price movement;

The majority of investors polled are expecting the company to provide a positive outlook:

  • Positive 75.0%
  • Neutral 25.0%
  • Negative 0.0%

Microsoft earnings have historically given investors a positive surprise (by slim margin) as they have exceeded investor expectations more times than missed:

  • Beat whisper: 28 qtrs
  • Met whisper: 1 qtrs
  • Missed whisper: 21 qtrs

Summary: Over the past four quarters Microsoft has topped the whisper number by an average of 5 cents. So the current whisper number is (on average) as expected this quarter as it is four cents ahead of the analysts estimates. The average price movement (after hours) is very limited and negative. The average price movement (post earnings intra-day, long or short term analysis) is negative. There is no consistent reaction to the whisper number, and and the company is considered a contrarian reactor to the whisper number. Data indicates that any long trade taken prior to the earnings report would result in losses. Contrarian investors aside, the negatives outweigh the positives and data indicates Microsoft does not present a viable short term trading opportunity.

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When analyzing the data we collect, the most important aspects are how a company reacts to beating or missing the whisper number, the average post earnings price movement, and in what timeframe (see link in profile to receive alerts). Keep in mind that trading on whispers is a technical play on market psychology, rather than a bet on a company's fundamental strengths.

A company's 'reaction' to the whisper number expectation is the key - on average companies that exceed the whisper are 'rewarded', while companies that miss are 'punished' following an earnings report.

Companies that exceed both the whisper number (from WhisperNumber.com) and the analysts estimate see a 2.5 times greater positive post earnings price move than companies that only exceed the analysts estimate but miss the whisper.

The whisper number is derived from an average of individual investors, floor traders, investment advisors, and market strategists expectations regarding earnings for the most recent quarter.

Source: To Trade or Not to Trade: A Microsoft Earnings Preview