posted by Howard Fosdick on Thu 24th Nov 2011 00:04 UTC
IconMy previous article described how you can use your tech knowledge to profit from the stock market -- if you combine it with financial analysis and careful research. This article analyzes several tech stocks. The goal is to start a useful discussion. What is your opinion of these companies? Even if you don't invest, this matters if you are in employed in IT. You're betting your career on the companies in whose products you specialize! You don't want to pick losers.

If you're new to investing How to Invest in Tech Stocks at OS News explains basic principles critical to success. You can also find free investing tutorials at About.com, Investopedia, and the College of Business at Illinois.

Remember that investing isn't just a matter of opinions on products, it's about predicting the success and failure of companies. Another investing principle: articles should disclose their author's holdings. I own none of these stocks at the time of publication, though my mutual funds may. A table defines investing terms at the end of the article.

Microsoft (ticker: MSFT)

This once-explosive growth stock has morphed into Grandpa Tech. During the ten-year period ending 8/31/11, the stock's total return with reinvested dividends was only 19%. In contrast, Ebay returned 120% and Oracle Corp. 135%. With rare breakouts, Microsoft's stock price tunneled between $24 and $31 per share for the entire decade.

Microsoft retains a legally-condoned monopoly in the desktop operating system and office suite markets in the United States. (Although the company was convicted of illegal anti-trust violations, the remedies assessed by the court system were ineffective.) This allows Microsoft to control OEMs and fend off the challenge of free software. It demonstrated this power several years ago when it easily aborted Linux's early lead in the emerging notebook market.

The result is a well-defended cash cow. The company has tried to leverage this wealth by entering new markets. Some efforts have been big successes (Xbox), some failures (Bing). Most are undistinguished. Over half of the company's income still comes from desktop software.

Microsoft has used its cash to increase dividends over the past decade. Today the projected yield is around 3%, while the forward Price/Earnings ratio is an attractive 8.2. The company has good cashflow, low debt, and sits on $63 billion. Motley Fool predicts Microsoft's longterm earnings growth rate at 11.4%.

Microsoft's big problem is that it did not foresee personal computers downsizing into smartphones and tablets. It's playing catch-up and its fate hinges heavily upon the success of Windows 8 and its Nokia deal. Cloud computing presents another challenge. The cloud could become a big new money maker. Or if handled improperly it could destroy revenues from Office.

If Microsoft can become one of the top few companies in the smartphones and tablet markets, it could blossom into an impressive growth stock once again. If it fails, it remains a solid value stock paying a good dividend. Its OEM monopoly with its desktop software ensures continued profitability.

I see only an outside chance at a big upside for this stock. In a neutral market, the likely scenario is slow growth in the share price with a well-assured, growing dividend.

Intel (INTC)

Intel is another tech value stock with growth potential. Tracking share price over the past decade shows a choppier ride than Microsoft but with the same result. On the day I write this piece, it quotes for $24.59 per share. Exactly ten years ago shares went for $24.42. Oops.

Like Microsoft, Intel has rock solid financials. The company has $11.6 billion in cash, just $2 billion in debt, and it yields around 3.5%. The forward Price/Earnings ratio is only about 10 and price per book sits at 2.7.

Intel has raised its dividend an average of 14.5% per year over the past five years. Projecting this into the future -- a likelihood given the company's cash hoard and revenues -- makes a compelling income story.

How about the company's competitiveness? Intel has been the world's largest semiconductor company for years and it still dominates. While each new chip generation reignites this race, Intel is likely to remain a leader for the foreseeable future. Perhaps those who follow the semiconductor industry can comment on how Intel will fare in future competition.

Like Microsoft, Intel is a tech company value stock with reasonable growth potential. Those with short time frames may have different experiences, but for those with long horizons, both stocks are nice income holds with some assured growth.

HP (HPQ)

If you've held this stock over the past year, you're one unhappy camper. From over $42 a share a year ago it's plummeted down to its current quote in the 20's. During Leo Apotheker's brief leadership, the company over-paid $12 billion to acquire Autonomy Corporation, ditched its new tablet just days after it hit stores, and announced that, in spite of being the world's number one PC supplier, it would exit that business! (HP has since reversed course on the last point.) HP's Board of Directors paid their ousted CEO $25 million for his 11 months of making these destructive decisions.

Many believe new CEO Meg Whitman will stabilize the situation and turn HP around. She has a good track record at EBay and executive experience at several other firms, though she lacks experience with an enterprise IT vendor. With HPQ trading at its deepest discount in years, many investors say "buy now," wait for Whitman to restore equilibrium, then sell on the inevitable bounceback.

It might well happen. HP is a tech blue chip with a Forward P/E of only about 6. But ultimately I think this company has bigger problems than its CEO can solve. Namely, its Board of Directors. Look at the Board's track record in appointing CEO's:
  • Carly Fiorina, who seemed to want a "big buy" regardless of what she was buying (a services vendor like PricewaterhouseCooper... no wait! A competing pc manufacturer like Compaq .. sure, why not?) 
  • Robert Wayman, stuck holding the football for six weeks when the Board was caught flat-footed by Fiorina's departure
  • Patricia Dunn, whose 18-month tenure blew up with the HP spying scandal
  • Mark Hurd, who led well only to show incredibly poor judgement in the sex harassment and expense account scandal that resulted in his termination. (After which the Board paid him $12 million for agreeing not to sue HP!)
  • Oops. Caught flat-footed again. Cathie Lesjak fills in for nine weeks.
  • Leo Apotheker, paid two million a month to destabilize and disorient the company. He did it in less than a year.
  • And now Meg Whitman, a CEO thought of solid judgment until the debacle of her self-financed $160 million attempt to buy the California governorship. She was humiliated 54% to 41%.
Let's end the pain with this summary by analyst Richard Band, editor of Band's Profitable Investing newsletter:

"... I recommended selling Hewlett-Packard ... Leo Apotheker did enormous damage during his short tenure, including the overpriced $12 billion deal for British software maker Autonomy ... My guess is that HPQ stock will sell at significantly lower prices in 2012 before Whitman can turn the ship around."  (Nov 2011 pg. 6)

Dell (DELL)

In the ten years between 8/31/01 and 8/31/11, Dell's earnings per share increased 144.3%. But the stock price declined 30.9%. How'd that happen?

Dell doesn't pay dividends, so stock price appreciation is all you get. It's been a lost decade for Dell shareholders.

The big challenge for Dell is that the economics of the PC market are deteriorating. The company's strategy is to transform itself from a box maker into an enterprise partner. It will sell services, software, and support in addition to hardware. Michael Dell sure believes Dell will succeed in this transformation: he bought $250 million in stock over the past year. But here's the rub. Doesn't this strategy sound familiar? IBM implemented it years ago, with Oracle in its footsteps, and now HP and Dell want to follow. Can everybody be your enterprise partner?

Dell has made good progress in shifting from a commodity box seller to a provider of complete x86 data centers. Integration of acquisitions EqualLogic, Compellent, and Force10 have propelled the company to a lead over IBM and HP for x86 revenue in north America during much of 2011. And if HP continues to flounder, Dell could pick up major market share. Dell is the trusted runner-up to HP in personal computers, for example, and it profits if HP falters.

Dell's financials are decent, with enough cash on hand to finance its goals and manageable debt. I like its price/sales ratio of 0.44 versus the industry average of 2.35.

For short-term traders, Dell provides lots of choppiness in the chart and a low share price. Clever timers could exploit this for some quick profits. For those with a longer horizon, you've got to believe Dell's growth story if you're going to invest. I'd argue Dell should enhance shareholder value by initiating dividends.

Oracle (ORCL)

Oracle Corp. is the Borg of the 21st century. You will be assimilated! Just look at its list of acquisitions: 60 companies since 2004. Oracle enjoys good customer relations and offers strong tech support and services. It's expanded its expertise in vertical applications markets. But the company makes its customers nervous with its attempt to span the Hardware/Software/Services spectrum the way IBM does. As one techie put it: “We are becoming an all-Oracle shop, but not by choice. They bought every company we deal with. And we don’t tend to want to put all of our eggs in one basket.”

Oracle argues its wide-ranging integration means greater performance and efficiencies. Customers worry about vendor lock-in and cost. You can see the problem in Oracle's core database business. Once open source databases were viewed as growing into competition with Oracle's high priced database product. Today Oracle owns MySQL and Berkeley DB, leaving only PostgreSQL independent in the original triumvirate. How'd that get by the Federal Trade Commission?

Oracle leverages its acquisitions. It's amassed over 300,000 customers that pay maintenance and support fees. Cross-sells are real. It all fits together with the services and support staff the company developed over the past twenty years.

Oracle's stock shows strong, consistent appreciation over 3, 5, and 10 year periods. The company pays small dividends of under 1% and sits on a cash war chest of over $31 billion. Forward P/E is a tad high at 19 but that's hardly above the industry average of 17.5.

The big issue for Oracle is whether the IT community will view its acquisitions strategy as customer-centric or Oracle-centric. So far customers are on board. Buying Oracle is an affirmative answer to the question: can this company continue its successful growth with its acquisitions strategy?

Apple (AAPL)

What a track record! iMac, iPod, iTunes, iPhone, iPad, and now the iCloud. It's not just a series of products, it's an integrated consumer ecosystem. Its power has driven enterprise sales of Apple PC's to their highest level ever. Apple's brand is strong and consumers rate the company's products highly. The company has its fingers in all the right media pies. Its iTunes store is the world's largest music distributor. Apple rents TV shows, movies, and apps. The Mac App Store started up in early 2011.

In contrast to Microsoft, Intel, and Dell, Apple's stock price has soared from about $10 per share a decade ago, to roughly $400 per share today. Bingo!

Apple's financials are enviable. Free cash flow is more than $30 billion, and the company has $80 billion in cash on hand and no debt. All profitability indicators just keep rising. The market cap nears $400 billion. Forward P/E is about 10, a very reasonable number for this winner. The stock pays no dividend. Earnings have jumped tenfold since 2006 as sales skyrocket:

Apple Sales Source Eweek

Apple's huge cash hoard is a blessing for the company but also a challenge. The company has to deploy it wisely to grow market share or increase profits.

Apple faces world-class competitors in Google (Android and online apps), Amazon (tablets and media sales), and Microsoft (personal computers and smartphone software). Can the company continue its success? Are there more parts to the ecosystem yet to be unveiled? Will the passing of Steve Jobs cause Apple to lose momentum? Apple followers, can you enlighten us all?

Google (GOOG)

Google is one glitzy glamour stock. Public only since 2004, it hit the market at around $100 per share has scraped the heights of $600+ several times. Though it offers no dividends, this growth story has been so compelling as to not need them to create wealth. Market cap is now nearly $200 billion.

On the product side, Google has shown great creativity, with a long list of innovative products. These include Google Docs, Google Apps, Android, Chrome, Chrome OS, Chromebook, Google+, Google Music, Google Earth, Google Maps, and Street View. There have also been major acquisitions like DoubleClick, YouTube, and others.

Here's the problem: 80% of Google's revenues still come from ads! The company is struggling to diversify. Given the company's youth perhaps it deserves more time. To me, success appears already priced into the stock.

Like Apple, this company has super financials. Earnings per share numbers are attractive, and the company has $35 billion to finance its schemes.

Going forward, Google faces new challenges in anti-trust, privacy law, and intellectual property rights. As Microsoft and IBM found out, you never know how tussles with governments will turn out.

Google's a monster tricky wave for those who fancy themselves expert big wave surfers.

Your Take?

Here's my bottom line:

Value stocks with upside -- Microsoft, Intel
Growth stories -- Oracle, Apple, Google
Seeking a story -- Dell
Disaster zone -- HP

I've just scratched the surface. What do you think? Tell us where you see these stocks going. I'll cover more tech stocks next month.

Investing Terms

Free investing tutorials are at Investopedia, About.com, and the College of Business at Illinois.
Find stock information at Morningstar, SmartmoneyMotleyfool and SeekingAlpha.
Compare several stocks in one chart at Yahoo! Finance.

Here are quick definitions of investing terms. For formal definitions look here.

---TERM---
---MEANING---


Market Cap
Market Capitalization is a measure of the size of a company
(the Share Price times the number of Shares Outstanding).
Capital Gains Increase in Share Price
(profit realized when you sell the stock).
Dividend
Money paid to shareholders (usually quarterly) for each share they hold. Many growth-oriented tech stocks pay no dividends.
Total Return Capital Gains (the increase in Share Price) plus Dividends.
P/E Ratio
How much you pay for earnings when buying a stock.
(The TTM Price Per Earnings Ratio is the Price Per Share divided by the past year's earnings, while Forward Price Per Earnings Ratio uses projected earnings).
Yield
How much a stock pays in dividends (expressed as a percentage)
(Dividends divided by the Share Price).
PEG
Price Per Earnings Growth. How much you pay for projected earnings growth.
(P/E divided by annual Earnings Per Share growth).
P/B
Price Per Book. How much you pay for a company's assets
(Share Price divided by Total Assets minus liabiliites).


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Howard Fosdick (President, FCI) supports databases and operating systems. He's had to learn about investing because as an independent consultant he doesn't have a corporate savings or retirement plan. Read his other articles here. Morningstar statistics were used in the preparation of this article but Morningstar analyst reports were not.
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