Apple (AAPL), Yahoo (YHOO), and Intel (INTC) are in different segments of the high technology industry. But judging from their recent earnings reports, they all share one problem: slow revenue growth stemming from the lack of radical innovation. Apple's revenue growth (yoy) of 4.19 percent is better than the previous quarter (0.86 percent), but still well below the rates experienced in 2009-2013 periods. Most notably Apple's sales were almost flat in US and Europe. Yahoo Inc.'s net revenue declined slightly in Q3 as display ad prices remained under pressure. Intel Corp.'s Q3 results exceeded expectations, but its current-quarter revenue outlook disappointed analysts as tablets continued to soar at the expense of PCs largely powered by the chipmaker - a sharp contrast with the revenue performance of their peers. What should investors do?
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For years, Apple's stock has been the Wall Street darling, and for good reasons. Its earnings and revenues grew by leaps and bounds, as it pioneered one blockbuster product after the other, the MacBook, the iPod, the iPhone and the tablet. But after churning out different versions of each product, the company's growth has been slowing down. If history can offer any clue about the future, Apple can learn a lesson or two from Sony (SNE) Corporation and PC makers like Dell Computer and Compaq Computer: Coming up with new product versions (product differentiation) isn't a sustainable strategy; it cannot keep the momentum of a high-flying company going.
In the late 1970s and the early 1980s, Sony Corporation developed a new VCR model every year. New models were loaded with extras to keep consumers away from the competition. But competitors caught up with Sony, adding similar features to their own VCRs. In fact, it didn't take long before VCRs became too sophisticated for the average user, fueling a cottage industry that developed technologies to make the VCR user friendly. Realizing that the strategy was no longer working, Sony took another pioneering step, returning to the design of a simple VCR, but it was too late: Sony was fighting the last war.
What do these lessons mean for investors?
It depends on the investment style of each investor. Momentum investors may want to stay away from the stock until they get better visibility into the product pipeline, looking for the next iProduct that will create a new industry, as the iPod, the iPhone, and the iPad did in the past. Value investors may want to stay with the stock, as it continues to display sound financials-a low PE, hefty operating margins, and plenty of cash. In addition, the company has a stock buyback program in place and pays a good dividend that can get even better should activist investors who have been accumulating the stock have their way.
For years, Yahoo's stock has been out of favor, as a number of strategic mistakes challenged the company's momentum turning long-term investors away from the stock. Since the hiring of a new CEO Marissa Mayer, Yahoo's stock has rebounded nicely, trading near a 52-week high. Today, it is trading north of $33, well above its 100-day and 200-day moving averages. Anyone who has visited Yahoo's site recently would probably have noticed that it looks different, alive and vibrant.
Yahoo's decline was caused by the failure of the company to recruit and retain the right leadership. In the meantime, Yahoo has been growing bigger by acquiring one start-up after another. Between September 1997 and April 25, 2011, Yahoo acquired 64 companies, often paying a hefty premium like the $5.7 billion it paid for Broadcast.com and $432 million for eGroups. The problem, however, is that most of these companies were in the wrong space, as Yahoo has failed to expand its presence in mobile search and the social media.
Expanding in the wrong direction, Yahoo failed to compete effectively against Google and Facebook. In addition, Yahoo did fail to achieve "economies of scale," the benefits associated with the large size. This can explain why the company has failed to boost its top and bottom lines, disappointing its stockholders.
Yet, Yahoo is trading at a low multiple, below that of Google and AOL; it has reasonable operating margins; enjoys a strong industry franchise; and has taken a number of steps to undo the mistakes of the past, moving the company in the right direction: mobile internet, where growth is - in 2011 global mobile internet subscribers per 100 people increased by 87 percent, compared with 8.5 per 100 people of traditional internet. Specifically, Mayer wants to personalize the Internet, from search, to content distribution, to ads, and e-mail (as she did recently). Will this strategy be executed effectively? Will it help Yahoo catch up with Google?
Judging from the last earnings report, the answer is yes. That's why the stock is a buy, especially at these valuation rates.
The bottom line: With a strong franchise, sound fundamentals, and a new leader who moves in the right direction, Yahoo has a good chance to rise again. Long-term investors may want to accumulate the stock, but always keep an eye on the rapidly changing technology landscape where winners quickly become losers.
Don't count Intel out. The stock is a buy for several reasons:
1. An improving chart. Intel's stock continues to trade below the 100-day and 200-day moving averages, but it has crossed the 50-day moving average, signaling a possible shift in momentum.
2. A low valuation. At $24.60, the company trades close to 60% below its 2000 highs, with its forward P/E below the industry average.
3. An upgrade cycle. According to the Semiconductor Industry Association, global semiconductor sales totaled $25.73 billion in December, up 9.7% from April and 2% from the previous month.
4. Barriers to entry. Binding barriers to entry make the industry an oligopoly that allows Intel -- as a larger player -- to enjoy economies of scale while maintaining pricing power.
5. Increased dividend. Intel has been boosting its dividend for the last five years. It now stands at 4.10%, among the highest in the high-tech industry.
6. Successful transition from PCs to mobile devices. This happened with the introduction of new products like the Atom chip, which powers Windows 8 smartphones.