Big Tech Stocks at Bargain Prices
In the 1990s, a small group of technology companies, many of them tiny buds when the decade began, blossomed into the biggest roses the U.S. stock market had ever seen. For example, Microsoft (symbol MSFT) reached a market capitalization—that is, shares outstanding multiplied by price—of $586 billion by March 31, 2000. That’s about 50% greater than the market cap of Apple (AAPL), the world’s most valuable stock today. Microsoft wasn’t alone. At their peaks in 2000, Cisco Systems (CSCO) and Intel (INTC) each bore market caps just shy of a half-trillion dollars, and Oracle (ORCL) and the company then known as AOL Time Warner were at about a quarter-trillion.
But the world has changed. Big tech stocks started declining in the spring of 2000, and, with a few exceptions, they still haven’t recovered. Microsoft’s market cap is only $236 billion today, and Cisco and Intel are worth just over $100 billion.
The very nature of these stocks has changed as well. In the past, paying a dividend was a sign that a company was dowdy; investors in hot tech firms were only too happy to let smart executives retain and reinvest their profits. Now, however, Microsoft sports a dividend yield of 3.3%—more than Procter & Gamble (PG). Cisco yields 2.6%; Intel, 4.1%; and Apple, 2.5%. Moreover, in early March, Apple, Cisco, Intel and Microsoft each traded at less than 11 times estimated 2013 earnings. That’s considerably lower than the price-earnings ratios of P&G, Johnson & Johnson (JNJ), Duke Energy (DUK) and Standard & Poor’s 500-stock index as a whole (all prices and related data are through March 7).
In my view, however, the tech giants don’t deserve to be ostracized, because they represent some of the best values in the stock market. Many of them still generate double-digit earnings growth, have beautiful balance sheets and have shown that they can adapt to a changing marketplace that, in its latest evolution, is turning from personal computers to computing via mobile devices. At worst, you can collect your dividends while you wait for Mister Market to come to his senses.
Stocks of many tech giants are much cheaper than they were at the nadir of the 2000–02 bear market. In 2002, for instance, Cisco bottomed at just over $8. That year, the company, which makes hardware and software that are critical to the functioning of the Internet, earned $2.9 billion. Cisco now trades at $22, or about 2.7 times its 2002 price, yet its annual profits exceed $10 billion. And because Cisco has been buying back its stock over the past decade, it has two billion fewer shares outstanding, so earnings per share have quintupled.
There’s more. Cisco has $46 billion in cash, compared with $16 billion in debt (that’s net cash of about $6 per share). Cisco’s net profit margin (earnings as a percentage of revenues) is a lovely 26%; P&G’s is 16%, by contrast. Like many tech companies, Cisco does not have to plow big chunks of its profits into capital investment in new plants and equipment. And analysts on average project that Cisco’s earnings will grow 8.4% annually over the next few years. That’s not torrid, but it’s more than the average large U.S. company. In short, Cisco is a growth stock that the market has priced as an extreme value stock.
So is Microsoft, the world’s largest software maker, with a net profit margin of 30% and earnings expected to grow at the same 8.4% annual pace as Cisco. Microsoft’s stock bottomed in 2002 at just below $21. Today, it trades at $28, up by about one-third. Yet profits have more than doubled. As for Intel, its price is up by about half, but its earnings have nearly tripled, and analysts predict that they will rise 12.3% annually over the next few years.