If you favor a value-based, long-term, buy-and-hold investing
strategy, then you must have noticed how cheap some blue-chip tech
stocks are right now. The easy move is to put a bunch of them in your
portfolio and forget about them for 10 years. Unfortunately, tech
investing is rarely that easy. So what do you need to know before making
a decision?
Tech titans
First up, let's look at a chart of these tech titans. I've included a mature blue-chip stock, Johnson & Johnson by way of comparison. Enterprise value over earnings before interest, tax, depreciation, and amortization, or EBITDA, is used, because EV -- market cap plus net debt -- is a better measure to compare companies. Moreover, EBITDA is a good proxy for underlying cash flow.
All these companies look relatively cheap. Moreover, on a historical basis they are all a good value. In fact, Intel (NASDAQ: INTC ) , Oracle (NYSE: ORCL ) , and Cisco (NASDAQ: CSCO ) are all trading at substantial discounts to their pre-recession valuations. Why is IBM (NYSE: IBM ) the odd man out?
Adjusting early to structural shifts
IBM adopted a different strategy to the rest. It acted early to adjust to structural changes in the economy. The sale of its PC division to Lenovo in 2004 was a key part of its transition into primarily a software and services company.
Source: Company accounts
Consider how well Oracle's stock performed compared to Intel and Cisco over the last 10 years.
The charts demonstrate that over the last decade, goods, products, and services have commanded higher prices based on how "smart" they are. For example, think of the advanced electronics systems being fitted into cars, or smartphones versus landlines. The shift is mirrored in the outperformance of the one software and services company on the list: Oracle. IBM also did very well, precisely because it made the transition to selling more software and services.
Going forward, IBM's strategy is to sell its lower-margin businesses, and increase margin expansion at the expense of revenue growth.
So while its revenues are forecast to be flat from 2012-2014, its EPS is expected to rise 20%.
Oracle now facing challenges
The previous 10 years have been very good for Oracle shareholders. However, there is no guarantee that the next 10 will be the same. The company remains a very good value play, but it also faces its own structural challenge with its traditional on-premise, on-license sales being threatened by cloud-based software providers. Moreover, as cloud-based sales increase, Oracle will find it harder to bundle its hardware solutions with its software.
Accordingly, analysts have Oracle on low-single-digit revenue growth for the next couple of years, with only high-single-digit earnings growth forecast. Oracle is seen as being late to the cloud party, and its future growth depends on making the adjustment.
Intel adjust its business, Cisco tinkers
Intel is the worst performer of the four, and it's also facing some structural challenges. It wasn't the only company caught out by the acceleration in mobile computing at the expense of PCs. Subsequently, Intel has found its core PC processor market to be challenged as PC sales repeatedly disappoint, and ARM core processor designs have won out in the mobile market. Simply put, Intel's refusal to license ARM's architecture in a meaningful way, has hurt the company.
The good news is that Intel has invested in new processors (Bay Trail and Haswell) that should start to penetrate the ultra-mobile market as of this year. Intel will need to do this in order to hit guidance this year.
Cisco's challenges and opportunities are of a different sort. It's switching and routing divisions still generate low-single-digit growth, but it's not enough to get excited about the company. Moreover, its services revenues growth -- services make up around 21% of total revenues -- is really a function of how well it can sell its products into the marketplace. The real question is how well Cisco will invest its cash in growing its peripheral sales.
You can see the point illustrated in the following chart.
What you need to look for
Intel will become very attractive if it can establish a strong foothold in the mobile market. You'll want to monitor developments later this year.
Oracle needs to halt declines in its hardware sales and demonstrate that it can shift more revenues to the cloud while retaining margins with its traditional software. However, the stock is very cheap right now, and even stabilizing the company to GDP-type growth should see some good price appreciation.
IBM's story is one of ongoing margin improvements and the execution of its plan. Look for margin expansion. Cisco is intriguing because its sits on more than $34 billion in net cash and investments, while its market cap is $123 billion as I write. In other words, it has the capability to invest wisely and generate growth. Keep an eye on its acquisition strategy.
Each of the four has its own risks and rewards, but a portfolio that contains all four isn't a bad idea for a value investor.
Tech titans
First up, let's look at a chart of these tech titans. I've included a mature blue-chip stock, Johnson & Johnson by way of comparison. Enterprise value over earnings before interest, tax, depreciation, and amortization, or EBITDA, is used, because EV -- market cap plus net debt -- is a better measure to compare companies. Moreover, EBITDA is a good proxy for underlying cash flow.
IBM EV / EBITDA TTM data by YCharts
All these companies look relatively cheap. Moreover, on a historical basis they are all a good value. In fact, Intel (NASDAQ: INTC ) , Oracle (NYSE: ORCL ) , and Cisco (NASDAQ: CSCO ) are all trading at substantial discounts to their pre-recession valuations. Why is IBM (NYSE: IBM ) the odd man out?
Adjusting early to structural shifts
IBM adopted a different strategy to the rest. It acted early to adjust to structural changes in the economy. The sale of its PC division to Lenovo in 2004 was a key part of its transition into primarily a software and services company.
Source: Company accounts
Consider how well Oracle's stock performed compared to Intel and Cisco over the last 10 years.
The charts demonstrate that over the last decade, goods, products, and services have commanded higher prices based on how "smart" they are. For example, think of the advanced electronics systems being fitted into cars, or smartphones versus landlines. The shift is mirrored in the outperformance of the one software and services company on the list: Oracle. IBM also did very well, precisely because it made the transition to selling more software and services.
Going forward, IBM's strategy is to sell its lower-margin businesses, and increase margin expansion at the expense of revenue growth.
So while its revenues are forecast to be flat from 2012-2014, its EPS is expected to rise 20%.
Oracle now facing challenges
The previous 10 years have been very good for Oracle shareholders. However, there is no guarantee that the next 10 will be the same. The company remains a very good value play, but it also faces its own structural challenge with its traditional on-premise, on-license sales being threatened by cloud-based software providers. Moreover, as cloud-based sales increase, Oracle will find it harder to bundle its hardware solutions with its software.
Accordingly, analysts have Oracle on low-single-digit revenue growth for the next couple of years, with only high-single-digit earnings growth forecast. Oracle is seen as being late to the cloud party, and its future growth depends on making the adjustment.
Intel adjust its business, Cisco tinkers
Intel is the worst performer of the four, and it's also facing some structural challenges. It wasn't the only company caught out by the acceleration in mobile computing at the expense of PCs. Subsequently, Intel has found its core PC processor market to be challenged as PC sales repeatedly disappoint, and ARM core processor designs have won out in the mobile market. Simply put, Intel's refusal to license ARM's architecture in a meaningful way, has hurt the company.
The good news is that Intel has invested in new processors (Bay Trail and Haswell) that should start to penetrate the ultra-mobile market as of this year. Intel will need to do this in order to hit guidance this year.
Cisco's challenges and opportunities are of a different sort. It's switching and routing divisions still generate low-single-digit growth, but it's not enough to get excited about the company. Moreover, its services revenues growth -- services make up around 21% of total revenues -- is really a function of how well it can sell its products into the marketplace. The real question is how well Cisco will invest its cash in growing its peripheral sales.
You can see the point illustrated in the following chart.
Source: Company accounts
What you need to look for
Intel will become very attractive if it can establish a strong foothold in the mobile market. You'll want to monitor developments later this year.
Oracle needs to halt declines in its hardware sales and demonstrate that it can shift more revenues to the cloud while retaining margins with its traditional software. However, the stock is very cheap right now, and even stabilizing the company to GDP-type growth should see some good price appreciation.
IBM's story is one of ongoing margin improvements and the execution of its plan. Look for margin expansion. Cisco is intriguing because its sits on more than $34 billion in net cash and investments, while its market cap is $123 billion as I write. In other words, it has the capability to invest wisely and generate growth. Keep an eye on its acquisition strategy.
Each of the four has its own risks and rewards, but a portfolio that contains all four isn't a bad idea for a value investor.
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