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.â€
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:
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:
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 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). |
– – – – – – – – – – – – – – – – – – – – – –
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.
None of this analysis is new or surprising which means the conclusions is already factored into the price.
Oddly enough in the current economy betting at random is more profitable than betting analytically. I wouldn’t advise that to anyone, but still, let us check again in a year and see how these recommendations have turned out?
Edited 2011-11-24 00:46 UTC
Thanks for posting it.
Dell – better than you think. They have a respect now in the data center they didn’t have 8 or 10 years ago. I think they’re closing in on HP and IBM.
Microsoft – will grow. They’re smart and they got the bucks.
HP – well, one we agree on. I wouldn’t touch them with a 10 foot pole.
I don’t think HP is doomed, their services division is very strong (former EDS).
You want a good return on investment? Then work hard. Invest the money you earned (earning means you worked for it) in a good house, a good car or a good bicycle or something useful. That is what real life is about guys.
Apart of house and gold, most things actually decrease in value over time, don’t they?
Edited 2011-11-24 14:09 UTC
In Australia even housing is dropping.
Gold has zero value until you use it to do something useful, housing has no value until someone use it to actually house himself and Money has no value until you spend it to buy something useful. The money you earn has a lot more value than the money you win or steal. You may buy less things with only the money you have earned but those things have more value because they will make you happier and they don’t taint your soul.
Edited 2011-11-25 07:14 UTC
Same here.
Also, I have no respect for people who have so little affection for their company that they can go around selling shares of it to complete strangers who are only here for the money. I wouldn’t encourage such business by buying such shares.
Ask me for X amount of money that you promess to reimburse in Y time with Z interests, it’s alright, but stocks… No, thanks.
Sorry to be a pedant but you should disclose whether you have an interest (holding) in any of these companies. Otherwise I enjoyed these summaries!
Read the 3rd paragraph, it does exactly what you ask.
1915…$20 Dollar Gold 1 ounce piece bought:
1) Nice Hat
2) Nice Suite
3) Nice Shoes
4) Money left over for a night on the town.
2011…$20 Dollars (minus the Gold) paper bill
Dinner for Two at Fast Food joint and very little else.
2011…$20 Dollar 1915 1 ounce Gold piece will buy:
1) Nice Hat
2) Nice Suite
3) Nice Shoes
4) Money left over for a night on the town.
-Hack
$20 invested in the Dow Jones Industrial Average in 1915 would be well over $4000 today.
Not completely sure what point you were shooting for, but if your point is that keeping your savings in cash is a bad idea then I would say the same for gold, especially since the prices do look distinctly like a bubble at the moment.
I call your BULLSHIT and raise it 1 ounce of gold.
Oh really? $4000 dollars.
What company stock would that have been?
The stock Market went bust in the 20’s/30’s. Most stock went to zero or less.
What kind of Genie in the bottle fantasy are you talking about that would give you the foresight to pick a company 100 years in the future and the stock or even the company would still exist?
Most companies and stocks over the past 100 years have gone bust. How about that Blue Chip GM stock?
BUST. Seen Detroit lately? BUST.
Destroyed, utterly.
Looks like 1945 Dresden Germany after it was fire bombed into oblivion.
So what risk would you pick? Picking a stock that would survive 100 years for $4000, or One ounce of Gold you can keep in your desk?
You can bet your bottom dollar Gold isn’t done with its current market rally either. Once the huge swings in the market are brought down by people losing vast sums of stock value, and selling their gold to cover that loss.
Gold is going to rocket to the moon.
Especially when you got crooks running everything. People are already leaving in order to protect just the hard work they have invested from Bankers, IRS and other thieves.
-Hack
I was very explicit about the specific investment, buying balanced into the Dow Jones Industrial Average index, which started the year 1915 at about 53 points (http://stockcharts.com/freecharts/historical/djia19001920.html), and ended trading today at 11,231.78 points. This comes out as a gain of 211.92x the money, which at an initial investment of $20 would give you $4,238. Now you would lose some money here in rebalancing the investments to fit the index, but in the short-term movements are almost random (and the index constituents change very slowly) so not that many reinvestments would need to be made. Certainly it would take a very boneheaded strategy to not handily beat the gold price of $1681 today (the price was indeed around $20 an ounce in 1915 as you point out).
I additionally personally believe that gold is in a bubble which is about to deflate whereas the stock market is more or less fairly priced at the moment.
Actually, the price of the dollar was fixed against gold until 1976 (“the gold standard”), so the price of an ounce of gold didn’t change until 1976. Then the price of gold didn’t go through the roof, it’s the dollar that fell bellow the floor. Every 40 to 50 years we need to change the money system because it is not sustainable. Our financial system leads to cycles of over production and depressions, each one worse than the previous one. When things are becoming unbearable, we change the system with a new deal or a world war.
Edited 2011-11-26 08:17 UTC
Good God.
You have it all backwards.
Gold never changes in value, unless of course, something happens that makes it irrelevant.
(The Apocalypse or the Second Coming or Nuclear War, Asteroid Impact.)
But then, if that happens, who cares about Gold, or anything for that matter.
The only thing that changes with respect over time, as I demonstrated in my first example of a Suit and a night on the town, is the value of _everything else_ with respect to Gold.
Gold _never_ changes in value, ever.
It has been that way since recorded history.
Gold is money, despite what Bernanke and his crony thieves on Wall Street tell you. Bernanke stood up in front of Congress in front of Ron Paul and told him Gold,…_GOLD_ is not money and that it was an asset.
Besides, if you could print paper, and give it too all your crony friends as money, OF COURSE you would say Gold is not money. You would _NEVER_ want Gold to be money because you can’t print it and give it too all your friends and make your selves SULTANS while everyone else goes on food stamps!
I almost laughed myself into oblivion, after reading you think Gold is in a Bubble.
A Bubble!
I bet all those MF Global, GM Investors, MCI, Enron…(Sorry list is too long here…) investors thought Gold was in a bubble too!
Now they are sitting on a street corners with no pot too piss in!
Please, please join them!
LMIO
-Hack
The only thing gold doesn’t change in value against is gold. The fact that the price of gold is relatively stable when considered over vast periods of time is a bad thing when considering investing your savings, since as noted gold has lost value against the Dow Jones Industrial Average.
Also, this is a fact despite gold being at a historical advantage in this comparison at the moment. If we had instead looked at 2001 you would have gotten a mere $400 for your ounce of gold (when adjusting for inflation into 2011 dollars), a mere fourth of the current value which you claim to compare well to the 1915 value. As a comparison the Dow closed at a little bit over 10,000, a mere ~13% lower than today.
So gold is not at all stable short-term, and the long-term is more favourable towards broad stock market investment. This is a pretty direct consequence of another fact; Gold is not very inherently valuable, and the pricing comes down to human follies and investors speculating. This is something that stock investments don’t suffer from to the same extent, since there is a physical company, usually with physical assets, making sometimes physical products, underlying the stock.
Try reading some financial history before making such idiotic comments.
Every $10 share in Coca Cola issued in 1917 is now worth over 100,000 (after accounting for splits).
Of the original 20 companies in the Dow Index 19 are still in operation (most are now under different names). The only company that is no longer trading is US Leather. US Leather was voluntarily wound up in 1956 and the company assets returned to shareholders.
Major American corporations over 100 years old (some have been renamed):
Exxon
Caltex
IBM
The following major corporations were all founded before 1850:
Wells Fargo
New York Times
Western Union
Reuters
Macy’s
Corning
Levi Strauss
Aetna
Berkshire Hathaway
Proctor&Gamble
John Deere
Colt
Du Pont
Amtrak
The massive Japanese conglomerate Sumitomo has been operating continuously since 1590.
For every 1 that has been successful, I can name 10 that went broke.
I would like to point out, that over the years, through currency inflation, and revaluation/destruction of the currencies, those calculations are far from correct.
Particularly in the case of your 1500’s Japanese company example.
Ironically, every one of those currencies when those companies were either created or destroyed, were re-evaluated in…
_GOLD_
For the companies, countries or institutions you cite.
Good try though.
You know, there is a good reason why Gold is at $1600 or so an ounce right now. It isn’t because people think the worlds gonna end.
It isn’t because people are Gold bugs, and it isn’t because gold is in a bubble.
People are buying gold because they are seeing FACTS of the situation:
1) The Robber Barons have returned, and they want all the money YOU STOLE from them. They want your car, your house, your bank account balance.
_EVERYTHING_.
They are getting it too, just read the paper. Watch your congress pass laws that make them able to seize just about anything they want.
They are even taking peoples homes they don’t owe a dime on!
2) With corruption, comes destruction. Historically when these types of people arrive on the scene, the currency goes to shit.
That means after you work hard all day long, next year your hourly wage buys less.
I don’t want to work the same hours and earn less than I did last year. I want to keep what I earn, and I want it to buy stuff I need, no matter how long I keep my money.
3) Governments get desperate…..no, historically when these Robber Barons return, they get brutal and they steal _everything_ they can get their hands on.
Gold provides a way for you to save what you have even after they sieze your house and your property.
A good example is in Germany when they experienced war and currency collapse. 1 ounce of Gold kept hidden safely, bought 1 families safe trip over the german border into switzerland.
Why? Because some soldiers can be bribed, in exchange for not shooting you if you give them gold. (In the US, we don’t have soldiers on the street corners….._yet_.)
There are so many historical lessons for owning gold over paper money, I really don’t understand why people have such a hard time with it.
Also, I would like to point out, most people who own Gold right now, use to own stocks.
They got out, because they now understand the system is being run by criminals, and cannot be trusted to hold their investments for a long length of time safely.
In 2002 I use to own a 401K, but I understood what was happening, and I paid the _substantial_ penalty and bought all gold and silver with it.
In closing, the other historical aspect to this is, deja vu. This is a cycle. Once the government is replaced, and the thieves are removed from finance, naturally we will see a return to honest investing.
That is the good news. Then Gold and the new currency will be revaluated, and buying stocks and owning less Gold will be in vogue again.
The bad news is, historically, that only happens after huge depressions, and world wars that follow from them.
I doubt this time will be any different.
-Hack
I suggest you read this before commenting further.
http://en.wikipedia.org/wiki/Gold_as_an_investment
If you bought gold in 1980 you would be 25% down in real terms.
If you bought Dow indexed stocks in1980 you would be up 600% in real terms.
I don’t much care about stocks but I definitely do care about my career. I got one good take-away from this article. To make good career choices you have to consider company fanancials and overall success, not just their products.
In order to make money from stocks, you need 3 things
a)Know the companies you invest into (let’s assume that due to our geeky nature, we got that coverred for tech stocks, though we really don’t).
b)Knowledge of economics (a real degree, not pretending to understand economics like Eric S Raymond)
c)Knowledge of how the stock market works (when to be bearish, when bullish, how to short etc)
Most geeks fail at b and c.
Edited 2011-11-28 07:51 UTC
Microsoft – as time pass, desktop PC will only lose market share, I am sure it soon will start to shrink and same goes for Microsoft cashcow! if they do not find any other stream of revenue anytime soon than best solution is:
“shut it down and give the money back to the shareholders.”*
*Michael Dell, Dell’s CEO
same goes to Intel: if they do not find way to get into handle market, ARM and others will be new kings and intel will be king of shrinking desktop market.