Tech Stocks!

My 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 atAbout.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. Oracleenjoys 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,
Smartmoney,Motleyfool 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 CapMarket
Capitalization
is a measure of the size of a company
(the Share Price times the number of Shares Outstanding).
Capital GainsIncrease in Share Price
(profit realized when you sell the stock).
DividendMoney paid to shareholders
(usually quarterly) for each share they hold. Many growth-oriented tech
stocks pay no dividends.
Total ReturnCapital Gains (the increase in
Share Price) plus Dividends.
P/E RatioHow 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).
YieldHow much a stock pays in
dividends (expressed as a percentage)
(Dividends divided by the Share Price).
PEGPrice
Per Earnings Growth
. How much you pay for projected earnings
growth.
(P/E divided by annual Earnings Per Share growth).
P/BPrice
Per Book
. How much you pay for a company’s assets
(Share Price divided by Total Assets minus liabiliites).

– – – – – – – – – – – – – – – – – – – – – –

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.

24 Comments

  1. 2011-11-24 12:45 am
  2. 2011-11-24 1:31 am
  3. 2011-11-24 1:58 am
    • 2011-11-24 4:32 am
  4. 2011-11-24 7:27 am
    • 2011-11-24 2:08 pm
      • 2011-11-24 11:13 pm
      • 2011-11-25 7:13 am
    • 2011-11-27 7:50 pm
  5. 2011-11-24 1:26 pm
    • 2011-11-24 7:09 pm
  6. 2011-11-24 7:09 pm
    • 2011-11-25 3:20 pm
      • 2011-11-25 8:32 pm
        • 2011-11-26 2:17 am
          • 2011-11-26 8:15 am
          • 2011-11-26 7:17 pm
          • 2011-11-27 10:43 am
        • 2011-11-26 8:56 am
          • 2011-11-26 7:58 pm
          • 2011-11-27 9:19 am
  7. 2011-11-24 7:11 pm
  8. 2011-11-28 7:45 am
  9. 2011-11-29 10:36 am