Should Investors Bail on Big Tech?
Oct 23rd 2013 11:30PM
Updated Oct 23rd 2013 11:32PM
Technology earnings are starting to trickle in, and it appears the one conclusion investors are realizing is that global technology spend is slowing. There have been a few giants, within the tech sector, whose earnings are painting similar pictures, which is they're beating on profits but missing on revenue.
This was the case when chip giant Intel reported its third-quarter results, and a similar result emerged when a fellow large-cap technology company reported on October 17. It's now clear the government shutdown, and debt-ceiling fiasco, took their toll on technology spending domestically, and broad uncertainty is now rippling through emerging markets. As a result, should investors abandon large-cap tech stocks in light of these troubles? Or are there still technology behemoths performing well in the current environment?
PC growth stuck in neutral
Intel's results were largely what investors should have expected, given the declines in global personal computer shipments. In all, Intel posted 9.5% earnings growth on flat revenue. While Intel deserves credit for navigating such a tough period for PCs, questions still remain about its plans for mobile device penetration.
Intel has invested heavily in its new Bay Trail mobile chips and has promised that these would enter tablets in a meaningful way, but that has yet to be proven. Moreover, Intel recently cut its 2013 capital expenditure budget by $200 million.This likely means it isn't confident enough in its strategic initiatives to keep investing heavily through the end of the year, given global macroeconomic uncertainties.
Big Blue sings the blues
Meanwhile, investors were treated to an even rougher third quarter when International Business Machines reported its own earnings.
All told, IBM reported 4% lower revenue, with particular weakness in its emerging-market segment, including China, which was responsible for half the company's revenue decline. While a 4% drop might not seem like much, IBM missed consensus estimates on revenue by nearly $1 billion, and this quarter's results marked the sixth quarter, in a row, of falling sales.
Thankfully, the company has a laser-like focus on cost controls, which allowed it to boost its earnings per share by 10.5%. But the market quickly tires of big companies that are only able to produce EPS growth through cost cuts and share buybacks. Sooner or later, revenue needs to get going in the right direction, and it's clear, from the markets reaction to IBM's earnings, that investors are quickly losing patience.
For what it's worth, IBM reiterated its 2013 outlook for at least $16.25 per share, which means investors are getting a fairly decent opportunity after IBM's stock drop. The company now trades for about 10 times its full-year guidance, representing the cheapest valuation the stock has seen in some time.
This shouldn't be surprising, since IBM stock is down about 8% this year, and nearly 20% since it closed at an all-time high in March. Its performance significantly lags the 21% gains notched by the S&P 500 this year, and to date, IBM is the worst-performing stock in the Dow Jones Industrial Average this year.
Meanwhile, this tech giant can't be stopped
One technology sector heavy-weight that is simply firing on all cylinders is search-giant Google , whose revenue and profit results both blew past expectations. Metrics across the board showed strength, in the most-recent quarter, including 26% growth in paid clicks, 12% growth in total revenue, and 36% growth in earnings.
There was nothing but bullishness in Google's report, and investors reacted just as you'd expect, sending shares past $1,000 for the first time in its existence. While a noteworthy milestone, it needs to be mentioned that share price alone is not a measure of a stock's valuation. Investors should keep in mind that Google now trades for about 30 times trailing twelve-month EPS, so it's not like this is a cheap stock.
The Foolish takeaway
In the end, investors are quickly realizing that in the current environment of restrained global technology spending, not all tech stocks are performing equally. It's apparent that while IBM and Intel struggle to meet estimates, Google can do no wrong.
Tech investors looking for growth should give clear preference to Google. At the same time, IBM and Intel are cheaper stocks on a valuation basis, and both pay dividends to shareholders, which Google does not. Therefore, growth and value investors may view IBM, Intel, and Google differently.
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The article Should Investors Bail on Big Tech? originally appeared on Fool.com.Bob Ciura owns shares of Intel. The Motley Fool recommends Google and Intel. The Motley Fool owns shares of Google, Intel, and International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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