Tech Company Futures, pt. 2

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
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

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

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
into higher-value software sales, and then into services. This strategy
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
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
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
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.

company is known for its search engine, but in the past several years
become painfully apparent that Google has stolen that crown. Meanwhile
social networks like Facebook pressure many of the original Internet
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

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
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
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
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
acquisitions strategy. Like Oracle Corp. and CA Technologies, BMC bought
dozens of smaller software firms to dramatically expand its product
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:

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
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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