Tech Investors Need a Chill Pill
Investors often fixate on a single narrative during earnings season, throwing otherwise solid companies under the bus if a solitary figure doesn't meet some imaginary expectation made up by Wall Street.
This quarter, the focus is on PCs, or specifically the decline of PC sales. It shouldn't be a surprise that PC sales are down because it's been reported for months, but the market still freaked out when both Microsoft and Intel reported soft PC sales. A little perspective and a chill pill may be needed for those overreacting right now.
Three companies that aren't going away
Microsoft's Windows division sales fell 6% on a non-GAAP basis in the second quarter, but when compared to an 11.4% decline in PC sales, that's not all that bad. What's being overlooked are two larger businesses for Microsoft: Server and Tools and Microsoft Business. Server and Tools sales were up 9% in the second quarter and the Microsoft Business division saw a 14% jump in sales. Even if we pull out sales from onetime upgrade offers, Microsoft's sales were up 3% for the second quarter, not bad considering how bad the PC market is. I'm not saying Microsoft is a high-growth company anymore, but projecting its demise is very premature.
Intel's story is even more interesting. Revenue was down 5.1% in the second quarter due to a 7.5% decline in PC client sales, the company's biggest segment, but it may be at an inflection point as it tries to get into mobile. Revenue was up 2% from a quarter ago and next quarter management expects sequential revenue growth of 1.6% to 9.4%. After winning the Samsung Tab 3, the company may be gaining momentum in mobile with a 14 nm chip coming out next year.
Apple is another company that can't seem to wow investors, even with $6.9 billion in quarterly income. A 1% increase in sales won't get anyone excited, but with a dominant position in smartphone and tablets and a balance sheet that would make most countries drool, Apple isn't going anywhere anytime soon. Let's not forget the investors in Samsung were also disappointed with sales this quarter, so when we put Apple's slowdown into perspective, it's not so bad.
Value stocks in tech
The biggest reason I think investors need to chill out about earnings from Microsoft, Intel, and Apple is the incredible value at which these stocks trade. Below, I've outlined that Microsoft and Apple both trade with P/E ratios below 10 after accounting for cash and Apple's trailing P/E ratio of 7.5 is usually reserved for dying companies. Intel is a bit more expensive, but it pays a hefty 3.9% dividend and still has a choke hold on the PC chip business, even if it's in slow decline.
Net Income (ttm)
P/E Ratio Ex-Cash
No time to panic
These are no longer the growth stocks they used to be, but the market has already priced no growth into shares. We know that the PC market is in decline, so slow Windows, chip, and Mac sales shouldn't surprise anyone. The reaction to earnings was overdone and, over the long term, I think investors will settle down and push each of these industry titans higher.
When you step back and think about it, there are only a handful of companies who dominate tech and they're each set to win in different ways as our demand for all things electronic grows. Find out more about the winners in "Who Will Win the War Between the 5 Biggest Tech Stocks?", The Motley Fool's latest free report, which details the knock-down, drag-out battle being waged by the five kings of tech. Click here to keep reading.
The article Tech Investors Need a Chill Pill originally appeared on Fool.com.Fool contributor Travis Hoium manages an account that owns shares of Apple, Microsoft, and Intel. The Motley Fool recommends and owns shares of Apple and Intel. It also owns shares of Microsoft. 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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