It is becoming increasingly easy to find tech stocks that are trading at value stock levels. Major tech companies used to regularly trade at a premium to other stocks, but now many can be had for single digit PE ratios, while the S&P 500 Index trades for about 14 times earnings. The tech stocks that appear to faring the worst are the ones with strong links to PCs. That is because PC sales have been weak and are likely to remain impacted by the growth in tablets, which is currently being dominated by the Apple (AAPL) iPad. That dynamic is not going to change soon, so the PC industry is not a very exciting area to invest in right now. This is why one of the world's largest PC-maker, Hewlett Packard (HPQ), is trading near 52-week lows and for just about 4 times earnings. As a leading chipmaker to the PC industry, Intel (INTC) is also trading near 52-week lows. Dell (DELL) and Advanced Micro Devices (AMD) shares have also been hard hit in recent weeks.
For a while, Microsoft (MSFT) shares seemed to be able to dodge the bullets that were hitting stocks that are highly tied to the PC industry. Earlier this year, investors held onto hope that a new release of Windows 8 would create a new upgrade cycle for the entire PC industry and help boost Microsoft shares. Some analysts and investors were also excited about the new tablet device called "Surface," which was launched in the past couple of weeks. However, now that both the Surface tablet and Windows 8 have been launched, investors appear to be far less excited about the future outlook for Microsoft.
The future of PC is in doubt depending on who you talk to and it is not hard to find people declaring the "death of the PC." While the dominance and level of unit sales for "Wintel" PCs might never be the same, there still appears to be a case to be made for stocks like Microsoft. While many people think of this company as being the maker of Windows, it also owns other valuable lines of business like Skype which offers communication services, video game hardware and software such as the Xbox and Kinect and many popular game titles. While Windows and related software brings in the vast majority of Microsoft's revenues, Skype and video games do offer strong growth potential. For example, Skype has over 660 million registered users and that number keeps climbing. If the company is able to increase monetization for the massive user base, it could provide a major growth catalyst.
The current and future outlook: For now, and the next few quarters, Microsoft shares could remain under pressure along with most stocks in the PC industry. It has not helped that a key executive left the company shortly after the Windows 8 launch, and the Surface tablet is likely to face a tough time in gaining traction when the iPad has so much momentum. For this reason, it's probably too early to take a large position in the stock. Two potentially major catalysts for the stock (the Surface and Windows 8 launch) have come and gone and that could mean that the most likely scenario is for the stock to trade a lot like a bond. It has dropped to about $26 per share, and it offers a yield of roughly 3.5% which is right in the range of what bond investors look for in terms of yield. Microsoft has a relatively stable source of revenues, and stability is another desirable attribute for many bonds. It has a fortress-like balance sheet with about $67 billion in cash and just around $12 billion in debt. This horde of cash reduces risks for shareholders and it gives the company plenty of money to spend on development of existing and future products. The bottom line is that Microsoft shares might continue to be brought down as investors seem to continue fleeing from PC-related stocks. However, investors that are happy to collect "bond-like" yields might want to consider the stock, especially on any additional pullbacks. Investors who want growth should probably look elsewhere. While Microsoft might disappoint growth investors, it is likely to outperform plenty of bonds because it already offers a solid yield and the dividend payout could increase over the years and give investors some protection against inflation. For example, Microsoft's quarterly dividend was 11 cents per share in 2008, but thanks to consistent increases, the quarterly dividend is now 23 cents per share. For that reason, Microsoft shares could be perfect for income investors.
Here are some key points for MSFT:
Current share price: $26.60
The 52-week range is $24.30 to $32.95
Earnings estimates for 2012: $2.90 per share
Earnings estimates for 2013: $3.24 per share
Annual dividend: 92 cents per share which yields 3.5%
Data is sourced from Yahoo Finance.
Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.