Don't Expect Big Stock Gains From These Tech Giants
Large stock price gains are often dependent on high growth rates. Companies with little to no current earnings can see their shares skyrocket as long as there is an expectation of meaningfully higher sales or profits to come. On the other hand, firms earning vast sums but with lackluster possibilities may see their stocks languish. Evidence suggests Microsoft Corp. , Cisco Systems , and even Apple could be facing a future of moderate growth, which might hinder share price appreciation.
Still beholden to Windows
Microsoft's share price has not advanced much since 2007, even after a 42% rise over the last year. Fears about the company's reliance on a Windows-based computer environment not being able to provide noticeably higher growth might be the reason. Recent results appear to support that concern.
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Microsoft's latest quarter did present some good news. Sales in the company's devices and consumer business, an acknowledged company focal point, grew 4%, helped by sales of the Surface tablet and Bing search advertising gains. Enterprise customer sales really impressed, growing 10% thanks to double-digit growth in SQL server revenue and commercial cloud sales more than doubling.
Future progress might be more difficult, however. Increased exposure to consumer devices could hurt profitability. These products have not been particularly lucrative so far. Device revenues jumped 37% in the last quarter, but gross margins decreased 54% due to increased cost. Microsoft's continued reliance on corporate Windows-related sales is also a concern. A rise in licensing for products like Windows Server, Microsoft SQL Server, and enterprise Microsoft Office was the primary reason for the company's top-line quarterly growth. While the company's Windows franchise is currently beneficial, it's not likely to provide above-average future growth.
Cutting costs as revenues lag
Cisco Systems shares have risen around 22% over the past couple of years, noticeably underperforming the roughly 60% climb of the tech-heavy Nasdaq Composite Index. The lag is possibly due to faltering progress on the company's top line.
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While revenues haven't advanced much, Cisco has enhanced the bottom line by cutting costs diligently. In the fiscal year ending in July 2014, workforce-reduction plans are expected to impact about 4,000 employees or 5% of the global staff. This latest initiative comes after 9,400 workers were previously shed in 2011.
While those steps have helped offset current sluggishness, better times are not assured. Sales growth in the latest quarter was less than inspiring, and sales composition was a serious concern. A 4% rise in service revenue appeared adequate, but the frail 1% gain in product sales was clearly disturbing. Lagging video and router demand can be blamed for the disappointment. Cisco's past focus on expanding its presence in the Internet video collaboration market and the importance of their router business, which makes up over 20% of revenue. Investors should monitor these weaknesses closely.
Will a saturated iPhone market hinder growth?
Apple has a well-deserved reputation for creating innovative and popular products. The iPhone may be its greatest achievement. The ubiquitous smartphone has helped Apple nearly quadruple revenue since 2009. But as the product saturates most of its major markets, recent figures suggest the days of superlative revenue growth may be over.
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Finding new iPhone revenue sources has become increasingly difficult. In the latest quarter, more than 60% of the $1.5 billion year-over-year revenue increase appears to have come from a deal with NTT DoCoMo. The agreement, initiated in September, had DoCoMo, Japan's largest wireless provider, offer the iPhone for the first time.
Declining iPhone unit revenue makes finding growth even harder. In the most recent quarter, Apple received roughly $577 per phone sale, down from $581 in the previous quarter and $619 a year earlier. The consequence shows up on the bottom line. In the latest fiscal year, ended in September, product revenue and volume were both up 9.2%, year over year, but gross margins and operating income waned. This trend may continue. Apple's current-quarter guidance suggests revenue of $55 billion-$58 billion and gross margins between 36.5%-37.5%, compared to quarterly revenue of $54.5 billion and a 38.6% gross margin posted a year earlier.
Apple does have some potential bright spots, however. The long-awaited iPhone deal with China Mobile, the world's largest wireless carrier with more than 750 million mobile customers, should help boost sales volumes in the short term, and Apple's huge cash hoard is a major advantage. Carl Icahn's well-known attempts to increase share buybacks and dividend distributions could boost investor enthusiasm if successful.
History has shown that high-growth prospects can be the key catalyst for meaningful share price appreciation. Companies offering only moderate growth usually find it difficult to achieve big stock gains. The data suggests Microsoft, Cisco, and Apple may each be facing a low-growth future, which would tend to discourage substantially higher share prices. Investors may find it prudent to temper any expectations for outsized gains when considering a purchase of these tech giants.
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The article Don't Expect Big Stock Gains From These Tech Giants originally appeared on Fool.com.Bob Chandler has no position in any stocks mentioned. The Motley Fool recommends Apple and Cisco Systems. The Motley Fool owns shares of Apple and 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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