My 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
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
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 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.
Amazon
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.
Yahoo!
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
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
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 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:
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.
– – – – – – – – – – – – – – – – – – – – – –
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.
Thought this was OSNews.com, not the Wall Street Journal.
Honestly, no matter what is posted here there’s always someone to complain, whether it’s too technical, or not technical enough, or “yet another Apple-article”, or “yet another Microsoft-article”, or about too obscure things to matter, or not obscure enough to matter..
Is it that hard to ignore the articles you don’t feel interested in and just be glad there is OSNews at all?
Amen and hallelujah!
IBM is truly international, with operations in 170 countries worldwide. 45% of revenues are from the U.S., while other countries provide 65%.
So IBM has a revenue of 110% :p.
that’s still 3% short of the european voter turnout
http://www.osnews.com/story/25721/EU_parliament_blocks_copyright_re…
IBM will hopefully produce stable PRAM ( http://en.wikipedia.org/wiki/Phase-change_memory ), which could be mass produced.
Google, Yahoo, and other like Facebook are not Tech Companies. They use tech products (Software, Servers, Networking and Chip based products)but dont make a living at it. No, they sell advertising and pump alot of stuff to attract eyeballs to drive higher ad revenues.
Google develops algorithms. I say that’s pretty tech. Unless your criteria is that a tech company must create almost all of its tech products in house…
It seems is criteria is that you are a tech company if your users are your customers, ie, if your users are buying stuff from the company. Otherwise, Google, Yahoo and Facebook create almost all of its tech products in house…
That’s because some of y’all have some of the new business models (Google et al) ass backwards.
The “customers” are the ones providing the advertising, the “product” is the billions of hits, eyeballs, and people buying the “customers” products. I.e. when you do a web search in google, you are the product.
As such google et al are indeed tech companies, they simply have different product/revenue/business models.
This is like arguing that Microsoft sells shrink-wrapped boxes of polycarbonate disks. Technically true, but the software is the attraction.
It isn’t a large percentage of their revenue, but that is mostly because their revenue in advertising is just so incredibly large… They DO sell technology, and they are a big player with some of their products (Google Apps for Enterprise for instance).
If what you were saying is true, then Microsoft isn’t a console company, because they only make <10% of their money there. Yet they are…
As usual… All depends how you want to gamble. If you want to be reasonably sure to make some money, but want to be reasonably sure to not lose too much, then you go for IBM and Amazon, outside of economical crisis, you will get a steady increase, and perceive a yearly dividend. But then frankly, you will be better by buying from an investment fund which will have the capacity to be diversified.
If you want to take a high risk, and accept a high chance of lost, then you can go for the small startup (BMC), the company that might be recovered (Cisco) or the one that might be bought (Yahoo).
At the end, the real question is always how much you want to risk your money, and how badly you want to make a lot of money.
Sorry, which BMC are you talking about?
The one BMC I know, BMC Software according to wikipedia has been founded in 1980 and it has revenues for almost 2 Billion US$, so it doesn’t seem to me neither small, nor a startup.
Yahoo- agree that this is a company in trouble. Lots of employees, and lots will be let go soon. Why would anyone buy them other than for their user base? If it weren’t for the ATT-Yahoo deal they’d already be history.
IBM- interesting view, there. Never realized they’ve been doing so well, comparatively.
Cisco- wish you had more details on their strategy, that’s going to mean more for their future than the financials you cite.
BMC- surprised they’re still around! Keep on fightin’, BMC dudes.
I usually compare Cisco with the servers division from HP. HP servers are the best I have worked with, but are more expensive and so we are starting to buy from their competitors, that have also increased their quality. Cisco is facing great competition from the likes of Juniper or A10: they’re way cheaper and the products are not bad at all.
I’m not a networking guy at all, so take what I write with a grain of salt, but I personally love working with Juniper. Junos is really just a commercial fork of FreeBSD.
Though I don’t always agree with what you write (I recall taking great exception to a recent submission of yours…) I’d just like to say that I appreciate the time and effort that go into your contributions and that I enjoy reading them.
Thank you!
I try not to use the word hate too much, but Cisco really annoys me more than any other tech company. Their products are expensive and don’t play well with solutions from other companies.
Firstly BMC.. We use a number of their products (the bladelogic stuff mainly) in our organisation. There are a number of major hurdles that I see in that suite of products. 1) Overly complex, 2) Slow release cycles don’t keep up with vendor versions (possibly because of pt 1. 3) Difficulty in extending the functionality with a big question mark over cost effectiveness and the ability for those addon’s/expansions to continue working cross version (i.e. if you upgrade your bmc tools do your api’s remain static, and if they do does your software still work). This is particularly evident in the work flow stuff. I wish them the best of luck, I know in my future I wouldn’t in good conscious recommend them to anyone wanting an agile organisation despite what their marketing material says.
Cisco.. by far the leader in routers and switches in terms of sales volumes.. I feel that while the ASR products have taken some of the thunder from Juniper it’s still a me too platform. It’s playing catch up on the features that Juniper have had for some time. While it is a good first effort it’s a huge difference between the traditional IOS and that’s a big training difference.. not as much as going from IOS->JunOS but it’s still a jump. On the security front it’s playing catchup in a big way.. I am in the process of doing a major product comparison between a 7 different vendors security products.. so far there is nothing except price that would keep us using cisco and it’s just not good enough in a compliance centric security world that we live in.. Companies like Fortinet, Palo Alto Networks have nailed the solutions pretty well.. where is cisco in that area? their products are a mish mash with what appears to be no global view of how they are all meant to fit together. This is a topic I feel very strongly about.. we use Cisco today for security, but looking at what else is on the market it’s almost impossible to justify moving forward. Ironically we use Juniper today and are moving to Cisco for future core projects.. win/lose.
IBM… We are a HP shop, but I have come from organisations who are multi-vendor and HP x86 was the king of the hill until the newer generation of x series arrived.. the 3550 etc which closed the lead that HP had and then over took it.. We had HP come out and give us a presentation on their G8 product yesterday, some of the features in there have been in the IBM products for years.. but then there are some innovations on the HP front and the G8 has the potential to be a really great product.. however the big question is have they fixed the reliability problems we have on the G7? (40% increase in failures when compared to the G6 on an estate of ~3500 servers). IBM are still innovating and there are some interesting things, the big challenge that IBM are going to have is on the software side.. some of their software suites are so overly complex they are very difficult to maintain and deploy and often need heavy customizations to work properly.. that means how do they get upgraded? the answer is professional services.. good for IBMs bottom line but bad for customer satisfaction if your a mid tier business… I think IBM has the best potential out of Dell/HP into the future.. and I can’t see Sun.. oops I mean Oracle doing anything positive.. Larry thinks that 99% margins in x86 are normal.. pfff..
Is a jungle inside. Sure, it’s a pun, but it’s also 100% true! There’s more than one reason they’re hiring so many people, and it’s not just for growth: Amazon swallows people and spits them out with how things are done in so many of their groups/departments. I’m sure there are some groups that use a good process and proper environments for QA and developers, but I can absolutely guarantee you based on first-hand experience working under their roof that some of what they do would make you cringe when it comes to process and environments. During the time I worked there in one group (just short of 9 months) the turnover was higher than the time I spent years ago as a pizza delivery driver in a chain pizza restaurant, and understandably so.
Amazon is the 8 billion pound gorilla in their space in many things: what they need to worry about long-term is competitors that execute better when it comes to quality and reliability of their systems, and attracting a large enough customer base (I’m not talking individuals buying stuff from them, but merchants, for the most part). Amazon, I feel, may allow themselves to grow too complacent in this regard, precisely for the same reason Microsoft (I’ve worked under their roof, too) allowed Windows quality to become a bad joke amongst many in the past: they had the dominant position, and didn’t feel threatened enough to do a better job, since they didn’t have much reason to fear customers going to someone else.