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I am mostly interested in technology stocks and have many years of experience investing in this sector. My goal is to conduct deep research on companies that have unique and special technologies that can potentially deliver extraordinary gains. My investment decisions are mostly based on... More
  • Big 4 Computer Stocks Head To Head 0 comments
    Sep 4, 2013 3:28 PM | about stocks: AAPL, GOOG, MSFT, IBM, HPQ, CSC, CBR

    For investors who love computer companies, Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT), and IBM (NYSE:IBM) are the four biggest companies in computer-related industries in terms of market capital today (and it doesn't look like any other companies are overtaking any one of their seats anytime soon). Naturally, investors either invest in these four stocks or constantly keep an eye on them. For many, it is worth differentiating these four companies in terms of their strengths and weaknesses to help investors decide which stocks fit their investment style better. The following are my personal thoughts about the pros and cons of these four stocks and their recent developments.

    Apple

    Pros: For now, Apple is still the technology company with the highest brand image and the best ability to charge premium prices for its products. It still has quite a strong "trendy" appeal to many consumers of tech gadgets, and it is unlikely that another company will dethrone Apple as the king of sexy tech gadgets anytime soon. Most likely, the company's new products will continue to be hotly sought after for several more years to come. Valuation-wise, the stock is very reasonably priced at a trailing P/E of just over 12 and P/S of about 2.6, especially considering its whopping 50% yearly growth rate right now. If the company can keep growing at its current rate, and assuming the stock's P/E and P/S ratios stay the same, people who buy the stock today should see quite a fast appreciation in their investment and will enjoy additional gains if the stock's P/E and P/S ratios increase.

    Cons: As Apple matures, the general trend of the corporate life cycle tells us that its growth rate may start to drop. As the company has commanded large market shares for all of its main product lines, there is a chance that the company may lose market shares if it cannot maintain its reputation for top-notch innovation, marketing, brand management, and sales. After the passing of Steve Jobs, many analysts are concerned that the company's ability to create revolutionary technologies and exciting products has been permanently lowered. The company's gigantic market capital of $450 billion or so makes it very difficult for even the largest financial institutions to significantly push its stock higher. Historically, there has been no company in the world able to keep its market capital above $500 billion for a long time. History seems to tell us that it is more likely for a company of this size to start making execution errors and get caught by competitors rather than to maintain dominance.

    Notable Recent News: Apple unveiled iOS 7 in June. The company said it was the most significant iOS update ever. The new OS came with a completely redesigned UI and control features. The most important difference that a user will immediately notice is that information and apps are displayed on multiple "layers" which the user can easily toggle and scroll. An important new tool added to iOS is "Control Center," a tool that Microsoft Windows users have been using for a long time (known as "Control Panel") but has not been present in iOS. This feature should close the gap between iOS and Windows in terms of ease of managing settings. Another interesting new feature is AirDrop, which allows a user to easily share content with people in their contact list through a peer-to-peer communication mechanism. ZDNet gives the new OS a very positive review. Will iOS 7 convince many Android users to jump ship? Only time will tell.

    Google

    Pros: Google is probably the best "systematic innovator" in the world right now. After the great success of its first invention (the automatic, algorithm-based, online search engine), Google kept on creating popular and vastly profitable new products, year after year: Google Maps, Google Blogger, Android OS, G-Phone, and so on. Now it is making inroads in tablets and cloud computing. Due to the scale of the economy and positive network externalities, its search engine and Android OS enjoy strong competitive advantages, and new/smaller competitors face stiff barriers to entry. Due to the company's wide range of dominant products, Google's shareholders enjoyed some degree of diversification by just owning this one stock. The company is still growing at a fast rate of 33% right now, justifying its relatively high valuation multiples.

    Cons: Unlike the other three of the big four, Google does not issue dividends, excluding itself as a choice for dividend-driven investors. It is the most expensive stock among the big four in terms of valuation multiples, making it the most risky investment from a relative valuation perspective. If the company's growth somehow slows down even just temporarily, its stock can witness a sizable drop in price. As dominant as Google is in online searching, the positive network externality for a leading search engine is weaker than that for a leading operating system or productivity software (such as MS Office). If one day a competitor's search engine becomes indisputably better than Google's, many people can and probably will switch to the competing search engine, dealing a serious blow to Google's advertising revenue.

    Notable Recent News: Google has put enormous effort and resources into Google Cloud this year because the company recognized that, as I said in my last article, cloud computing is arguably the most important battleground for all computer companies now. Google recently bolstered the security and backup functions of its cloud storage service, aiming to take more customers away from its major public cloud competitor, Amazon Web Services. In other news, Hugo Barra, a key top executive in Google's Android unit, is leaving Google to join one of its major competitors in China. This move can potentially have a negative impact on Android's market share in China and even back home in the US if the Chinese manufacturer starts to sell its phones in the US.

    Microsoft

    Pros: Microsoft still handily commands the biggest market shares of operating systems for personal computers (91% of market share according to BGR), office suites (95% of market share according to Forbes), Internet browsers (53.5% of market share according to WebMoney), and server software for small to mid-size companies (75% of market share according to Forbes). Because of the strong, positive network externalities of these products (users need the application or system they use and documents they create to be compatible with other users'), most people will keep on using Microsoft's products even if they think some competitors' products are better. More likely than not, Microsoft will continue to enjoy guaranteed revenues for many years in these product segments. Like Apple, Microsoft's current valuation multiples are very reasonable and the company has been issuing a stable level of dividends to its shareholders for many years.

    Cons: Since the late 1990s, Microsoft has hardly been a leading visionary and innovator of the computer and digital world. It failed to recognize the importance of search engines, losing to Google in the late 1990s, and it failed to recognize the importance of developing mobile OS, falling behind Apple and Google by a large extent from 2000-2010. Now, Apple and Google have extended their advantages in mobile OS by offering a huge amount of applications, including office and productivity applications, to users of mobile phones. As more and more devices become smaller, lighter, and mobile, more and more devices will be equipped with mobile OS rather than traditional OS. If Microsoft cannot find a way to turn the tables in the battle of mobile OS, it is in great danger of seeing yearly shrinking revenues from its Windows and other major product lines.

    Notable Recent News: Microsoft's CEO, Steve Ballmer, just announced his retirement last week. This introduces a huge, unplanned uncertainty for the company and risk to its shareholders right now. The search for a new CEO to lead such a giant and complex technology company is a tough task for its board of directors. Many companies, including Hewlett-Packard, experienced a loss of vision, focus, good product segmentation, morale, revenue, and profit when a long-time CEO departed. Investors need to watch closely how the selection of the new CEO unfolds, to determine if this new figure can successfully lead the company and maintain its current level of excellence. On the positive side, Microsoft has fully recognized the importance of cloud computing and is putting maximum effort into Azure. According to InfoWorld, Microsoft announced in May that it would invest hundreds of millions of dollars to expand its hybrid cloud platform to China, Japan, and Australia. If it is successful in taking a commanding position of the public cloud in these markets, it will be able to take in huge new revenue streams.

    IBM

    Pros: Being the oldest and most mature company among the big four, IBM's business is probably the most stable. Its business segment of server products and enterprise applications are so deeply entrenched among big corporations and organizations that nobody, other than Oracle and SAP, can come close to matching IBM in this domain. Its service business is also widely used by big corporations and organizations. Most big companies just have to use IBM's products and services because reliability and security are too important for them to trade for lower costs of competitors' products. The stability of the demand for its products translates to very stable yearly revenues, gross profits, and net profits.

    Cons: First of all, IBM's service business, although still preferred by most big companies, is not totally irreplaceable. During the last financial crisis, some big companies started to give long-term computer service contracts to IBM's competitors, such as Hewlett-Packard (NYSE:HPQ), Computer Sciences Corporation (NYSE:CSC), and Ciber (NYSE:CBR), which charge significantly lower prices than IBM. The trend continues post-crisis, and IBM is facing increasing pressure in this business segment. Secondly, the company's inability to come up with important innovations means there is a low prospect for the company to show a higher growth rate in the foreseeable future. Last, IBM's P/E ratio is about the same as Apple's and Microsoft's, but its growth rate is significantly lower than Apple's and its dividend yield is lower than Microsoft's. Based on these comparisons, one can argue that IBM's stock is more expensive than Apple's and Microsoft's stocks.

    Notable Recent News: In an attempt to catch up on cloud computing and virtualization, IBM acquired Israel-based cloud and virtualization company CSL International in August in order to improve the cloud management and storage capabilities of its zEnterprise mainframe server system. Whether IBM can successfully increase its position in cloud computing has yet to be seen.

    Before I end my article, I would like to compare some independent and dependent statistic measures of the companies' four stocks, the S&P index, and the Nasdaq index. The table below shows the correlations among these four stocks, and the two indices, using the adjusted daily closing prices from 9/4/2012 to 8/30/2013 (the data for the past 12 months). For investors that have a significant position in funds tracking S&P or Nasdaq, Apple offers the best diversification for their products because it has negative correlations with both indices. For investors holding Google, Microsoft, or IBM, Apple also adds diversification to their portfolios because it is also negatively correlated to these three stocks. IBM is the second best in this regard.

    Correlations Between 4 Tech Stocks, S&P, and Nasdaq

     

    AAPL

    GOOG

    MSFT

    IBM

    S&P

    Nasdaq

    AAPL

          

    GOOG

    -0.67

         

    MSFT

    -0.35

    0.81

        

    IBM

    -0.16

    0.25

    0.09

       

    S&P

    -0.67

    0.96

    0.80

    0.19

      

    Nasdaq

    -0.51

    0.93

    0.83

    0.08

      

    The following table shows the coefficient of variations (standard deviation divided by mean) for the four tech stocks (based on the same period of daily price data). Apple stock is the most volatile, while IBM is the most stable. So, for investors who only invest in a small number of stocks and do not like volatility in stocks they invest in, Apple might not be a good choice in this regard.

    Standard Deviations

     

    AAPL

    GOOG

    MSFT

    IBM

    Coefficient of Variation

    16%

    10%

    10%

    4%

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: No content published as part of this article constitutes a recommendation that any particular investment, security, portfolio of securities, transaction or investment strategy is suitable for any specific person. I am not an investment adviser, and the content contained herein is not an endorsement to buy or sell any securities. Your investment decisions are made entirely at your discretion. By reading my article, you acknowledge that I am in no way liable for losses or gains arising out of commentary, analysis, and or data in this article.

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