It seems that no matter what the market does, investors still want to see which old tech stock is the one to own for the year ahead. Everyone still remembers the massive growth of the late 1990's despite what happened in 2000 to 2002 and the market malaise of 2008. We are going to still pass on a thought to you which many will consider heresy. Cisco Systems Inc. (NASDAQ: CSCO), Dell Inc. (NASDAQ: DELL), Intel Corp. (NASDAQ: INTC), Microsoft Corp. (NASDAQ: MSFT), and Oracle Corp. (NASDAQ: ORCL) have all evolved to the point that they may soon become no different than Grandma Furgeson's old fashioned utility stock she used to invest in.
We have made this argument many many times. But for 2009 we want you to embrace the notion that many of your old technology leadership companies have now become utilities or appliances. While there are still many outlying factors that are different, this is how these old leaders are evolving. That evolution is not the death of the companies. Not at all. But it will require a rethinking of how they need to be analyzed for the years ahead.
Utilities generally thrive from population growth and likely enjoy either monopolies or highly dominant positions. They have recurring clients who have to use their services whether they want to or not. Living without modern day technology via computing and communications would be no different than calling your electric & gas company and telling them you are going back to fire wood and candles. They'd laugh and tell you they will be there next week or next year when come back to your senses. The only difference is that many of these tech stocks as the "new utilities" have refused to pay steady Eddie dividends that Ma Furgeson would want. For now....
The NASDAQ 100 fell a whopping 41.9% in 2008, which means that it gave back all of the gains of 2004 to 2007. We are not going to make any market calls just yet for 2009. Technology spending is going to be capped by the recession, and new spending trends are migrating to what seems to be either for the budget-oriented or those looking for long-lasting computers and software.
Cisco Systems (NASDAQ: CSCO) is the utility that dominates the data and communications equipment market. If it is digital data or audio data traveling anywhere from your phone or your PC, chances are that Cisco switches, hubs, and routers are involved. The former promise of growth has now been scuttled because of our great recession. CEO John Chambers now even refers to its as the toughest environment he's seen. There will be growth here again. Its corporate telecommunications products and its Telepresence will win more business as replacements to business travel. But again, the growth is currently scuttled. The company even tells you this right up front. Cisco and other backbone tech companies have said that corporations, governments, and communications providers are demanding that the new technology spending is something that will not be obsolete in a few years now. The only difference between this utility and Ma Furgeson's utility is that there is no dividend. The company at some point will have to decide what to do with its cash. It cannot make a $20 billion acquisition unless it goes in a new direction. At roughly 12-times earnings and with almost $30 billion on its books, there are lots of opportunities for the utility to send cash out. And when that dividend (if it comes), then Ma Furgeson will tell you it is the utility stock she wants to own.
Dell Inc. (NASDAQ: DELL) went in an entirely different direction than its arch rival of H-P and former rival IBM. It stayed in the PC business rather than diversified into services. Unfortunately, the PC business as an entire business sector has matured and is now just an appliance business. Who do you know in business that no longer has a work PC? Who do you know that either does not have a home computer or a notebook PC? And now comes the netbook for the travelers who need slightly better access than a smartphone. Throw in a recession. Now either go to Best Buy or log on to Dell.com. You will notice a bifurcated PC market. It is either high-end computing, or it is the sub-$500 PC. And now the sub-$500 PC is becoming mainstream. Even Apple has gone well into the sub-$1,000 market, and is going to have go far deeper than that. Growth is elusive.
The company has also spent too much on buybacks despite its cost cutting. It is making new management changes by getting rid of two outsiders and promoting from within, which many believe is a signal that Michael Dell is reconsidering his old turnaround (again). Analysts are no longer looking for earnings growth in the year ahead, but with nearly $10 billion in cash and at under 10-times earnings this year and next it will be able to fund dividends if it chooses to go the route of a utility. If Dell starts paying out a serious dividend that it says will be a steady and high one, then Ma Furgeson will tell you she'd own it.
Intel Corp. (NASDAQ: INTC) is in the same boat that Dell is in as far as the PC market is concerned, although it at least enjoys a massive market leadership position. Sure there is AMD, but Intel is just like Beck's song... "Where it's at!". All AMD does is insure that Intel will have to sell better and better processors for lower and lower prices. As goes the PC market, so goes Intel. The processor power that is available for even the sub-$500 PC is now more power than 90% of the user market's most basic needs. Intel is the brain behind your PC that is probably allowing you to read this and do other tasks right now. Ma Furgeson would tell you it is a great utility. At almost 14-times earnings and with declining earnings now expected, the focus now may be more on the $15+ billion cash arsenal. Its dividend is already north of 3% today, and it is a DJIA component.
Microsoft Corp. (NASDAQ: MSFT) at least has many other businesses besides providing operating systems for PC's. But guess where its mainstay still reside? It sells variations of Windows and Office, and that is where that massive cash arsenal that keeps accruing comes from. This move into cheaper and cheaper computing may actually be playing itself into Microsoft's favor.
Apple is a premium product no doubt and it has brand loyalists who feel far safer with its O/S variations. But guess what? With the virtualization program by Parallels Mac users can still run Windows. We will go ahead and take the hit from the Linux crowd with this statement: Linux just hasn't made the huge dent many expected. If you go buy a Linux PC from any retailer the first thing the salesperson (assuming they are one that can speak) will warn you about is that many functions or programs you currently use may not be compatible. It is almost as if Microsoft has factored in a subliminal tip to everyone for selling and buying a Windows program for the PC. And as far as the Office suites, well again this is the other component that keeps the monster rolling. Can variations of Office be replaced in time? Sure. Sun, Google, Corel, and others are working on that now. And they have been working on that forever. Microsoft still retains the lead here. But the market has matured. Its P/E is close to 10, it yields nearly 3%, and it holds nearly $25 billion in cash. Ma Furgeson would tell you it is a great utility and she'd own this DJIA component for that.
What about Oracle Corp. (NASDAQ: ORCL)? Larry Ellison probably feels a lot like Alexander the Great after conquering the last bastion of the known world. You rule and dominate, you still have some far reaching competition and know of many foreign lands that are not really on your own maps. But as far as what is known, it is mostly controlled. Oracle has acquired just about every small rival that it wants or needs, and SAP has never regained its lost ground. Enterprise computing is dominated by Oracle. But how many new businesses are there that are massive? How many new governments are there? OK, shoot me. The answer is many, but the budgets are now being constrained globally. Is that going to change in 2009? Oracle's enterprise dominance will likely stay, but the recession will likely keep this one feeling like a utility stock. Ellison did say he would try to use the weak market to make acquisitions. But again, these are now bolt-on deals or enhancement deals. The enterprise is now established. At about 13-times forward earnings and with its $10+ billion cash arsenal it could be a major dividend payer if it wants to. Ma Furgeson would tell you Larry Ellison runs a great utility after that.
This is not the demise of Tech Stocks. This is merely the evolution of tech and computing. It is certainly no insult to these companies, at least not in most cases. The markets have matured and for the near-future the old great growth stories have been interrupted. If the recession goes for more than another year then these companies will have little choice but to start deploying their cash via dividends. Go ask these dominant companies how well their share buybacks have helped. We all eventually invest like Ma Furgeson. The only difference is that we no longer clip dividend coupons off of share certificates and we no longer receive the dividend checks in the mail.
We did not include any DRAM companies in here for a host of reasons. But in that case we argue that DRAM (and in most current cases, Flash) is just a commodity business. The only difference between DRAM as a commodity and grain or gold is that DRAM prices seem to only go lower and lower.
Maybe the market will even eventually start using GAAP accounting for earnings rather than the pro forma numbers. The difference between GAAP earnings and non-GAAP earnings at most utilities is not that great. The difference in the two at tech "utilities" is still rather large due to stock options and other "one-time" expenses. If and when that changes, maybe even Warren Buffett or his eventual replacement will start to embrace these new utilities. At least no one uses EBITDA when referring to these anymore.
