posted by Howard Fosdick on Tue 27th Mar 2012 03:39 UTC
IconMy previous article analyzed some tech companies and their prospects: Microsoft, Intel, HP, Dell, Oracle, Apple, and Google. This article discusses IBM, Amazon, Yahoo!, Cisco, and BMC Software. The goal is to spark a useful discussion. What is your opinion of these companies? Do they have viable strategies for the future?

There are several reasons this topic is important. First, if you work in IT, you're betting your career on the companies in whose products you specialize. For example, if you're a DB2 DBA and you use BMC's tools, you're betting your future employment not only on these skillsets but also on the companies behind this software. The same goes for app vendors, as related by Thom Holwerda's OSNews article Depending on an Application Store for Your Income.

Second, it's always useful to know about major tech companies and their prospects. I no longer work with Microsoft products, for example, but it still behooves me to know the company's plans. Microsoft is an integral part of the tech sea in which we all swim. You don't want to be surprised if the company creates a tsunami that changes your world.

Third, some techies profit from their insights by investing in tech stocks. The OSNews article How to Invest in Tech Stocks tells how. I'll look at companies mainly from this perspective in this article because financial measurements are a useful way to judge corporations. (Disclosure: I own no stock in these companies other than through mutual funds.)


IBM has an impressive history. Once identified as a computer hardware manufacturer, the company adroitly shifted into higher-value software sales, and then into services. This strategy has since been copied by HP, Dell, and Oracle. IBM has a strong track record as a well-run organization. Contrast its careful selection of Virginia Rometty as the new CEO, with her 30 years of experience at the company, to the way struggling archrival Hewlett-Packard continually parachutes in risky executives from the outside.

IBM's stock outperforms Intel, Microsoft, HP, Dell, and Cisco over the past ten years (see chart below). HP surpassed IBM in annual revenue in 2006, but IBM is by far the more profitable company. IBM's forward-looking price per earnings ratio (P/E) is about 13 and it pays a dividend of about 1.5%.

IBM 10 Year Stock Performance IBM 10 Year Stock Performance         Source: Morningstar

IBM is truly international, with operations in 170 countries worldwide. 45% of revenues are from the U.S., while other countries provide 65%.

IBM is also well-diversified by business segment, as shown in this 4Q 2010 revenue breakdown:

IBM Revenue by Segment
IBM Revenue Breakdown   Source: IBM

How strong is this company? The famously cautious investor Warren Buffet bought $10.7 billion of IBM stock a few months ago (the stock price has risen since). Certainly, IBM's longterm stability provides a solid foundation for IT careers. Even my friends who bet their careers on IBM technologies that didn't thrive -- like OS/2 and Lotus Notes -- have done well because the company protects its customer base. This gives IT workers sufficient time to learn new skills and refocus their careers if necessary.


As the world shifted from local stores to online ordering, we all knew some company had to be the big winner. Amazon is that company.

Borders and Circuit City are among its victims, and even now Office Depot and OfficeMax struggle in the face of this Internet juggernaut. Amazon had $34.2 billion in net sales in 2010, which was 8% of the global $415 billion e-commerce market. 43% of this revenue came from media sales and 54% from electronics and general merchandise. Amazon operates internationally in the U.K., Canada, Germany, Austria, France, Japan, and China. It counts 66 million customers worldwide.

While only 3% of revenue comes from other ventures, Amazon is smart enough to diversify into cloud computing services, e-commerce services, fulfillment and logistics, book publishing, and handhelds like the Kindle and Kindle Fire. Amazon's revenues are concentrated today but the company appears to have natural routes to broaden its business.

The main difficulty in judging Amazon is that the company doesn't provide sufficient detail on its revenue sources. Amazon didn't give investors any numbers on either Kindle sales or cloud services revenues in its first 2012 investor conference call. People are left to guess about these vital components of the company's business.

Amazon's net income has dropped since last year due to its investments. The company is hiring more staff for operations and customer service, creating new fulfullment centers, and plowing money into new products like the Fire. Amazon is sacrificing short-term profits for market share and greater sales. Will these investments pay off?

I believe they will, and that Amazon will continue its growth. Of course, that's not exactly going out on a limb. With an astronomical forward P/E of over 140, that's what everyone thinks. Like Yahoo! and BMC Software, Amazon stock pays no dividends, so the company must grow to reward investors.

What if you sell through Amazon and rely upon it for income? That may depend on the kind of content you sell. Amazon has been wrestling with traditional book publishers over margins for several years, and the fact it now sells more e-books than printed ones has upended the publishing industry. Lately Amazon's been fighting independent book publishers and even self-publishers. Music and streaming video (films and TV shows) have also migrated from physical to remote digital distribution, so margin competition will occur in these areas as well.

The bottom line is that if you create and sell intellectual property or are in content distribution, you face an unstable, changing world. Amazon will probably contest your margins. Ultimately, Amazon is but one moving piece of the complex, shifting puzzle you face as the world evolves towards new models of content distribution.


If IBM and Amazon are giants on a roll, Yahoo! is a giant in decline.

The company is known for its search engine, but in the past several years it's become painfully apparent that Google has stolen that crown. Meanwhile social networks like Facebook pressure many of the original Internet portals like Yahoo!. Yahoo! is not well diversified. Like Google, advertising accounts for over 80% of revenue. But Yahoo! lacks Google's knack for innovation and hasn't matched Google's success with new products like Android, Chrome, Docs, Apps, and others.

Yahoo! continues to be one of the most visited sites on the Internet. The site is 5th most popular in the U.S., with a monthly audience of 95 million (following #4 Amazon with 100 million and #1 Google with 185 million). Yahoo Search, Yahoo Mail, and Yahoo News are still big names. Its Flickr photo-sharing site remains popular, with 51 million registered members and 80 million unique visitors as of June 2011. But Yahoo! needs to figure out some way to leverage its brand and deploy its capital for new revenue streams. Perhaps it can evolve from an Internet portal into a media company that licenses content. Or maybe the company can join Google and Facebook in the race to profitably mine your data.

Yahoo! is buying some time to make these changes by big lay-offs. If it doesn't monetarize better soon, its main hope may be a buy-out. Just hope it's from the right partner. There have been consistent rumors that any of several companies might buy Yahoo!, including Microsoft, Google, and various consortiums.

Looking at its stock, YHOO has been a wild ride over the past decade (see below). The price has ranged from as low as $5 to as high as $40 per share. It shot up during 2003 and 2004, only to give back most gains during the 2008 crash. In the past year it has ranged between about $11 and $19, and it is in the middle of this range as I write. Forward P/E is about 17. The company's market cap is about $19 billion and it pays no dividends.

Yahoo! 10 Year Stock Performance Yahoo! 10 Year Stock Performance         Source: Morningstar

What happens if you own Yahoo! stock and the company is bought out? Usually share prices rise in anticipation of the buy-out. If you don't sell you before the deal goes through, you typically receive shares of the buying company, based on some ratio between Yahoo!'s stock and the stock of the buyer.

Cisco Systems

Cisco was the glamour growth stock of the dot com boom a decade ago. Since then, it's been an uneven and not especially profitable ride for longterm investors (see chart below). Cisco remains industry dominant for routers, switches, and related telecommunications equipment. But competitors like Juniper Networks nibbled at its market share while management over-emphasized growth and let profit margins deteriorate.

In response to last year's narrowing margins, Cisco announced a new initiative last fall, eliminating some underperforming product lines and focusing on high margin businesses like its video and web conferencing equipment. So far, execution has been good and the stock has responded accordingly (see chart). Over the past year, the share price has ranged between $13.30 and $20.65. It is at the high end of that range as I write this. The company appears on track for its 3-year annualized revenue growth target of 5% to 7%.

Cisco 10 Year Stock Performance Cisco 10 Year Stock Performance         Source: Morningstar

Cisco's challenge is that it charges a premium for its products. CEO John Chambers claimed in February 2012 that "I'm getting very little pushback today on prices." He states that Cisco's gross margins are back up to what they were two years ago, at 62.4% across its product lines.

Another challenge is with one-to-one unified communications on mobile platforms. If small players like Vidyo, OoVoo, and Fuze distinguish themselves sufficiently from Cisco's vision, they could steal a lucrative market away from the company.

Cisco is a $110 billion company with a forward P/E of about 10 and a 1.5% yield. The company has $38 billion in cash to fund its comeback. Earnings history underscores the company's need to re-focus on profitability.

Networking experts, what do you think? Can Cisco reclaim its mojo?

BMC Software

In this and my previous article, I've concentrated on large tech companies. BMC Software is different. It has a total market value of under $6 billion, so it is a mid-cap software firm.

BMC started out providing software for IBM mainframes over thirty years ago. This high-margin business supplied software mainframes were missing back when they were dominant.

As companies downsized, many mainframe software vendors, such as CA Technologies, ported their offerings to smaller platforms. BMC took a different tact. The company positioned itself as IT's solution to managing diverse platforms and competing products. With BMC software, you can, for example, manage Oracle, SQL Server and IBM DB2 databases residing on networked mainframes, Unix and Intel-based servers -- all from a single PC. Today BMC is a big kahuna in distributed systems management. Even so, mainframe income still makes up nearly half the company's revenues.

In its attempt to diversify away from mainframe software, BMC adopted an acquisitions strategy. Like Oracle Corp. and CA Technologies, BMC bought dozens of smaller software firms to dramatically expand its product line in the new millenium. So far the company has successfully leveraged these acquisitions.

As a mid-cap tech stock, BMC's share price reacts dramatically to quarterly results. Buy it and you better watch earnings like a hawk! The chart below shows how good quarters in late 2010 and early 2011 drove the stock sharply higher, only to experience a sudden correction with less-than-expected earnings in mid- 2011. A recent strong quarter yanked the stock back up:

BMC 3 Year Stock Performance BMC Software 3 Year Stock Performance         Source: Morningstar

BMC has good cashflow and minimal debt. The stock has a forward P/E of about 11 and it pays no dividend.

The big questions for BMC are:
  • Can it continue to diversify its revenues away from mainframes and into distributed systems?
  • Will its acquisitions strategy deliver continued success?
  • How successfully can it sell in the future against its larger rivals (IBM, HP, Oracle, and CA Technologies)?

Your Take?

Here's my bottom line on these companies:

Giants on a roll -- IBM, Amazon
Giant in decline -- Yahoo!
Giant is recovering -- Cisco
Smaller but resilient -- BMC

What do you think? Tell us where you see these companies going. I've concentrated on financials, so post your insights on corporate strategies and products.

You can find good analyses and news about tech companies at Morningstar and Wikinvest.

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Howard Fosdick (President, FCI) is an independent consultant who supports databases and operating systems. Read his other articles here. Thanks to Morningstar for the stock charts in this article. Proprietary Morningstar analyst reports were neither consulted nor used in preparing this article.
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