Tag: MSFT

The dangers of technology investing

Shareholders of Research in Motion (TSX: RIM) are likely feeling a lot lighter in the pocket from three months ago. I don’t have any comments on the valuation of the company other than that the market weights future performance than past performance – RIM over the past reported about $6/share in earnings and when combined with their $27 share price makes the company look like a spectacular value. Even when looking at the analyst estimates, most are projecting they will make $6/share for the next couple years.

The truth, however, is not so simple – the company is facing intense competition through a couple channels – Apple with their iPhone/iPad and Google’s Android operating system embedded on a myriad of devices that are chipping away at Blackberry. As shareholders of Nokia (NYSE: NOK) might know, when you give up a lead in technology, it may be permanent or at least very long.

In the “social networking” domain, Friendster was trumped by Myspace, and now Myspace has been trounced by Facebook. Predicting the evolution of technology is not easy.

In the “search” domain (i.e. online advertising), Google so far is the winner, with old players such as Lycos, Excite, Infoseek, Altavista and Yahoo left behind.

Microsoft, for the most part, appears relatively insulated from the change in technological trends, mainly due to people’s acclimatization to the Windows and Office suites. Linux’s various permutations has failed to permeate into the client marketplace to a significant degree while OpenOffice and its derivation (including Google Docs) has not penetrated Microsoft Office to any extent. However, a bet on Microsoft relies on the fact that these two core assumptions are true. While Microsoft does have a financially viable video game division, this is not the primary bet a Microsoft shareholder implicitly makes – rather, it is that they are able to maintain monopoly-level pricing on Windows and Office.

Apple shareholders also received adverse treatment from Microsoft back in the 1990’s and nearly faded into oblivion until they revamped their product marketing with the iMac. The question of 2012 is: Will Apple or Google shareholders receive the same treatment from some other upstart company?

Finally, with RIM, if you anticipate that people will be using Blackberries (or other RIM devices) in the future, RIM might be a good bet. Investors with clairvoyant abilities to predict future technological trends will be handsomely rewarded with either gains, or the ability to sell out of a stock before the rest of the market realizes that the technology trend has changed.

Skype – Another kick at the can

The news is making the rounds that Microsoft is paying a large amount of money for Skype, approximately $8.5 billion in cash.

It is virtually guaranteed the acquisition will lose money. EBay tried their hand with Skype back in late 2005 and they only had to pay $2.6 billion for the privilege before they threw up their hands in late 2007 when they dumped the company for a loss.

Now Skype has found a bigger sucker to sell itself to, which in this case is Microsoft.

All of these value investors that have their money in Microsoft have to be wondering what Steve Ballmer is thinking, and how much more money Microsoft will run themselves through before realizing that it has gotten to the size where it is unable to compete effectively outside of its Windows/Office monopoly.

Quick review of some large cap technology stocks

I am continuing to look at the US large cap sector, just for personal review rather than serious consideration. I am continued to be surprised by relatively good valuations, around the 10% yield levels. Most of these are in the first-generation “old-school” technology sector. Very well-known companies include the following, with some very anecdotal remarks on my behalf:

Microsoft (MSFT) – Trading at 9.3x FY2012 projected earnings, with $30B net cash on balance sheet, Windows/Office empire continued to be chipped away at with competition;
Intel (INTC) – Trading at 9.5x FY2012 projected earnings, $20B net cash on balance sheet, likely to be around for a long time, competition in mobile processors, but nothing in really ‘large scale’ CPUs except AMD;
Dell (DELL) – Trading at 8.6x FY2012 projected earnings, $8B net cash, well-known customer support/service issues, but otherwise entrenched in computer/IT market;
Hewlett-Packard (HPQ) – Trading at 7.3x FY2012 projected earnings, $10B net debt, along with Dell, entrenched in computer/IT market;
Lexmark (LMK) – Trading at 7.7x FY2012 projected earnings, $600M net cash, major supplier in printer/imaging market;
Xerox (XRX) – Trading at 8.3x FY2012 projected earnings, $8B net debt, in a similar domain as Lexmark;
Seagate (STX) – Trading at 7.2x FY2012 projected earnings, $0 net cash/debt, hard drive/storage manufacturer;
Western Digital (WDC) – Trading at 9.3x FY2012 projected earnings, $3B net cash, in a similar domain as Seagate;
Micron Technology (MU) – Trading at 8.4x FY2012 projected earnings, $600M net cash, memory manufacturer;

One would think that diversifying a position into these nine companies and calling it the “Old-school technology fund” would probably be considered a relatively safe alternative over the next 10 years, compared to the 3.4% you would achieve with a 10-year US treasury bond.

My gut instinct would suggest that these companies would still be around in 10 years, especially Intel, which has the biggest competitive advantage out of the nine listed above.

I am also assuming that smarter eyeballs than my own have looked at these companies, which is why I suspect there isn’t much extraordinary value here other than receiving a nominal 10% return on equity, which is pretty good for zero research.