Considering Taking Up Position In Old Tech Companies May Felt Disheartened By The Fact That Intel Had To Release Its Fourth Quarter Earnings.
Anyone Considering Taking Up A Position In Old Tech Companies This Week May Have Felt Disheartened By The Fact That Intel (US:INTEL) Had To Release Its Fourth Quarter Earnings earlier than expected because it had been hacked. ‘Hacked’ is probably too generous a term: the culprit accessed an infographic earlier than the rest of the market by correctly guessing the name of the online file.
It certainly did not help the stock market reaction to the results the following morning. The shares are down 10 per cent since the start of the week. So are IBM’s (US:IBM), after another set of disappointing earnings.
As both stocks fell this week, some investors might be looking for an entry point. After all, the old guard of big tech: IBM, Intel, Oracle (US:ORCL) and Cisco (US:CSCO), have an average forward price to earnings ratio of just 12 – well below the FAANG group of Facebook, Apple, Amazon, Netflix and Google-owner Alphabet on an average of 43 – and decades worth of industry know-how. But there are challenges that come with running big, old businesses in a market that values innovation and growth above all else.
Big blues in corporate IT
IBM, or ‘Big Blue’, is an unfortunate case in point. The company has failed to deliver consistent growth, prompting it last year to spin off a big part of its services business to focus on its more promising cloud computing division, But this quarter, its cloud and cognitive software was its most painful miss, with revenues dropping 5 per cent year-on-year to $6.8bn. Company-wide, sales fell 7 per cent, as corporate IT spending failed to bounce back at the end of the year.
Macro uncertainty is casting a shadow over much of the sector. Oracle’s cloud license and on-prem license sales fell 3 per cent in its last quarter, although that was still an improvement on a 7 per cent drop at the same time last year. Revenues from the Americas were flat – and given that the bulk of its top-line comes from its domestic market, here too investors are getting jittery over its next source for growth.
But this does not apply across the board. This week Microsoft (US:MSFT) posted record quarterly sales, with its net income up by a third to $15.5bn. Chief executive Satya Nadella again heralded “the dawn of a second wave of digital transformation” in the past year, as the company enjoyed a boon from remote working and in video games, helped by the launch of its new X-box console.
Laptop sales did particularly well, which also helped chip-maker Intel (US:INTC) in the past quarter. But the company has been struggling to keep up with Asian rivals TSMC (TPE:2330) and Samsung Electronics (KR:005930), pushing it to outsource manufacturing of some chip designs. The incoming chief executive, Pat Gelsinger, said that he was confident that the majority of Intel’s chips would be made internally by 2023 – although it is likely the company would continue to tap outside manufacturing for some products. The results capped off a year in which Intel was also dropped by Apple (US:AAPL) as a supplier for Mac chips, as well as being surpassed in market value by fast-rising peer Nvidia (US:NVDA).
The story in the UK
This is a rare moment when the UK tech sector is actually comparable to its American counterpart. Here too, the old guard of our software and reseller space are being challenged by younger companies. Sage (SGE), which long boasted that it was the LSE’s largest tech company, in some ways represents the convergence of British conservatism and tech. Apparently, the most imaginative and successful tech business we could muster was an accounting tool.
But now a more American optimism has finally reached our shores. JustEat Takeaway.com (JET) and Ocado (OCDO) reign at the top, with market values of more than £10bn, exceeding Sage’s £6.7bn. Deliveroo is expected to target a valuation that exceeds £3bn should it float this year. All have been loss-making – and as the market in London becomes more open to aggressive growth in lieu of profits, more tech could soon follow.
Pick cheap income or expensive growth
Not everyone has lost hope for the oldies on the block. American retail investors – who appear to have organised themselves on Reddit forum ‘r/wallstreetbets’ – flocked to GameStop (US:GME), Blackberry (US:BB), Nokia (HEL:NOKIA) this week, pushing up the stocks to new heights.
It seems that many of these Reddit-traders have not done much research into the shares they are ploughing into, with a good number of them riding what is essentially a self-fulfilling wave of momentum. But one thing does ring true: reputation. Like GameStop for Redditors, the old guards of Silicon Valley have not yet conceded their status in their field. Corporate IT budgets may be strained at the moment, but investors might spot a window to buy them as relatively cheap, tech income stocks, seeing as most of the FAANG group do not pay dividends to their shareholders.
But the market reflects the future, not the past. It is growth that is nipping at nerves. For investors watching the tech market, they will have to choose between cheap income or expensive growth. Looking at Microsoft’s consistent beats, we know which type we would rather own.
This news was originally published at Investors Chronicle.