When Microsoft introduces its long-awaited Windows 8 operating system Friday, it will be the first Windows rollout to face real competition since, well, forever. Today, smartphones and tablets do almost all of the day-to-day tasks a PC does -- including sending e-mail, surfing the Web, and editing photos -- and do some of them better. Already, tech investors, long accustomed to a lift from Windows, are primed for disappointment.
At the same time, big data -- massive data centers that can marshall tremendous computing power -- is upending the traditional network, pushing information-processing into the palm of your hand. And it's happening faster than almost anybody expected, as last week's spooky earnings surprises at Microsoft (ticker: MSFT) and chip makers Intel (INTC) and Advanced Micro Devices (AMD) made clear.
So who are the winners and losers in a post-PC world? Apple (AAPL), Google (GOOG), and Samsung Electronics (005930.Korea) certainly stand to gain, and EMC (EMC) will be a winner in the big-data world. Obvious losers include PC makers Hewlett-Packard (HPQ) and Dell (DELL). Intel and Microsoft, which straddle both the PC and post-PC worlds, are tougher calls. Their high dividends and cheap valuations make them hard for investors to rule out.
On-demand computing, which is to say, the cloud, will benefit Amazon.com (AMZN), and Salesforce.com (CRM). And arms merchants to cloud providers, like storage giant EMC (EMC), also will prosper.
There are new challengers, as well. Workday (WDAY), Splunk (SPLK), and Qlick Technologies (QLIK), recent IPOs all, bear watching by investors. Promising startups that have not yet hit the public stage, such as equipment vendor Ruckus Wireless, also could be game-changers down the road.
SEPARATING GOOD INVESTMENT IDEAS from bad, however, isn't as easy as picking winners in the marketplace. Companies such as Salesforce and web-hosting outfit Rackspace Holding (RAX) may be essential to this sea-change, but their valuations are scarily high. Salesforce, at about $149, fetches 99 times fiscal 2013 earnings estimates, while Rackspace, which operates massive data centers for cloud services, trades at 86 times. Are their opportunities really that much greater than those at Apple, which fetches 11 times estimates, or at Microsoft, which trades at 10 times?
Probably not, argues Barron's Roundtable member Fred Hickey, publisher of the High-Tech Strategist. "Companies like Rackspace and Salesforce are classic story stocks," he says, "and it is very dangerous to own such stocks when everything they might produce in the way of earnings and cash flow is already priced in." Also in that boat, he argues, is Amazon.com, which stands to prosper if its Kindle Fire can elbow its way into the tablet computer market. But at 104 times earnings, that's a big if.
The table "Who Wins, Who Loses" sifts through both opportunities and valuation, to find the best bets for investors. Google's earnings flub last week notwithstanding, that company is still on our list of likely winners, which are few and far between.
IT'S A WHOLE NEW WORLD FOR Microsoft. Smartphones were still relatively primitive when Windows 7 was introduced in 2009, and tablet computers didn't even exist. Now, as the charts "Game On!" illustrate, they threaten the PC hegemony. Neither Microsoft, HP, nor Dell is a force in smartphones or tablets.
"It is becoming a mainstream idea that your PC is not the center of everything," says Kevin Landis of Firsthand Funds, who has owned Microsoft, off and on, for years -- and is nervous every time he does.
That said, Microsoft is putting its vast resources behind its Windows 8 operating system for phones and tablets. And at 12 a.m. Friday, it will begin selling a tablet computer of its own, known as the Surface, setting up a midnight madness event. So we'll know soon how the excitement stacks up against iPhone and iPad madness.
On Thursday, Microsoft reported flat year-over-year revenue, led by a 9% drop in the division that contains Windows. The numbers included pre-sales for Windows 8. Excluding them, sales in the Windows unit dropped by a third. At nine times next year's expected profits, Microsoft shares are very inexpensive, considering the strengths of the company's other businesses, including server software, databases, and collaboration. But unless Microsoft can show that Surface and all the other Win 8 devices will turn the tide for that part of the division, its stock will continue to suffer. Microsoft closed the week at $28.64 and yields 3.2%. (For more on last week's earnings mishaps at Microsoft, Google, and AMD, see Tech Trader.)
THE INEXORABLE SHIFT AWAY from PCs is causing havoc for manufacturers. This year, worldwide sales of personal computers are projected to drop about 2%, to 357 million units, according to IDC's David Daoud. In dollars, they will fall 5% to 6%. More telling: Smartphone sales are expected to surge 42% this year, to $294 billion, topping PC sales for the first time. And sales of tablets are expected to rocket 65%, to $59 billion.
To Dan Niles of Alpha One Capital Partners, this sounds very familiar. He worked in the 1980s at minicomputer titan Digital Equipment Corp., whose founder, Ken Olsen, famously said there was no reason anyone would want a computer in his home. DEC was later acquired by Compaq Computer and vanished without a trace.
Smartphones and tablets are similarly underestimated now, Niles asserts. For that reason, he's inclined to avoid Intel and Microsoft. "Go ahead, gamble they can make the leap to this new world," he s
ays. "I don't want that bet."
As the PC market fades, Intel is trying to maintain its lead in server chips, while becoming a force in phones and tablets. Last week, it reported that PC growth had slowed last quarter and this quarter to half its usual seasonal rate, disappointing investors waiting for spiffy new "ultrabook" laptops to make a splash. At the same time, CEO Paul Otellini said Intel's new Atom chip would be in 20 tablets this quarter, including the Surface.
The problem is that Intel has more to lose from the PC decline than to gain from selling cheaper chips for tablets and smartphones. The company's shares, which closed the week at $21.27, trade at nine times next year's estimates and pay a rich 4% dividend. While Intel may never be a growth company again, it probably won't hurt investors who own it.
Apple, trading at 9.1 times this year's projected profits, after backing out $117 billion in cash and investments, is priced quite reasonably, given its expected 24% growth in revenue this year. Even as one of the world's dominant phone makers, it has just 7% of the mobile-phone market, according to Gartner, giving it ample room to grow.
Samsung, the dominant global phone producer, shows no sign of stopping its gains at the expense of smaller companies. Its stock is also undemanding, at 7.5 times next year's earnings' estimate. The Korean-listed shares traded Friday at 1.302 million won, about $1,200; its unsponsored American depositary receipts are thinly traded.
THE OTHER SIDE OF THE POST-PC world is the cloud. On route 101 in Silicon Valley, Wal-Mart has posted signs reading "WALMART DATA," offering jobs to engineers in its San Bruno labs. That's a sign of just how mainstream it's become for companies to sift through enormous amounts of information.
Wal-Mart's quest, and others like it, are changing the very nature of data, says Paul Saffo, a tech pundit who runs Discern Analytics, a big-data outfit in Silicon Valley.
Big data ultimately will redefine the database. To track customer information and behavior in real time, and to respond to it instantaneously, companies are turning increasingly to databases that put information in the random-access memory chips of a computer, rather than on the disk drive, as has been done traditionally. Database-giant Oracle (ORCL) is fending off new competition from SAP (SAP), which sells just such an "in-memory" database. And start-ups also are targeting the database market. Among them: MemSQL, a Silicon Valley company started by former Facebook engineers.
For the moment, Oracle's traditional databases are benefiting from the surge, but that could change by this time next year.
Google is a player par excellence in big data. Sales of smartphones using the Android OS don't make the company any money upfront—it doesn't charge for use of the system -- but ultimately, all the activity on those phones is sending back to Google real-time data from the world that makes its searches more valuable to advertisers.
Google CEO Larry Page said on last week's call that the company was on pace to generate $8 billion a year from mobile devices. And some day, Google's self-driving car will bring the company real-time readings of traffic conditions -- another way to feed Google's rapacious appetite for big data.
And what of Facebook (FB), which, like Google, is building its own computers from scratch to redesign the data center? Facebook defenders take a typical Silicon Valley attitude, trusting it will try a number of ways to monetize the increasing use of mobile technology and eventually hit on a solution. Firsthand's Landis, who's owned the stock since before its IPO and confesses that he's sitting on a loss, says, "Even if they hit one out of 10 products right, that's enough."
Maybe so. But all of that experimentation could cause the company to step up spending next year, says Loomis Sayles tech analyst Tony Ursillo, who also co-manages the Saratoga Advantage Trust Technology and Communications Portfolio. And that could shock the Street, which is projecting roughly flat operating margins for the company.
Amazon.com is one of the most striking players in the post-PC world. Its Kindle Fire, starting at $159, is a truncated tablet -- little more than a means for users to feed at the Amazon trough. Two weeks ago, CEO Jeff Bezos told the BBC that the company breaks even on the hardware, preferring to "make money when people use our devices, not when people buy our devices."
Amazon has overcome many doubters over the years, but with a triple-digit P/E ratio, there's still a lot of doubt to overcome.
Salesforce.com is another cloud company with a heart-stopping valuation, trading at 40 times trailing cash flow. Salesforce has new competition, in the form of Workday, which went public Oct. 12 and popped nearly 70% out of the gate. While Salesforce's software for managing customer relations is important, Workday's focus on human resources—benefits and payroll administration -- is perceived as far more critical to companies.
Hickey predicts that Workday could lure away some Salesforce investors, calling it "the real deal" in cloud computing. But Workday is projected to lose money through fiscal 2015.
EMC is a less expensive way to play the cloud, says Ben Reitzes of Barclays Capital. "EMC's focus is on the hybrid cloud," he says. It has products that help enterprises shift parts of their data-processing into the cloud, reaping greater efficiencies, while maintaining full control of their critical data.
Another company to watch is Ruckus Wireless, which makes equipment that helps carriers offload cellular traffic onto public Wi-Fi hotspots. That is important because the faster connections of the latest smartphones and tablets will cause a surge in bandwidth usage, taxing the precious spectrum. Craig Mathias with Farpoint Group calls CEO Selina Lo "one of the smartest people I know" and a skilled entrepreneur. Ruckus recently filed documents for an initial stock offering.
AS THIS FATEFUL YEAR for the personal computer grinds on, some investors probably will bottom-fish for stocks. One that might be worth a look is Seagate Technology (STX), which trades at four times next year's earnings, less than one times sales, and pays a 4.6% dividend. Seagate has a chance to shift from the PC world to the post-PC world, by selling devices for the cloud and tablets. Unlike HP, which has a similarly cheap valuation, Seagate has a strategy for this and the means to implement it.
A factor that's important for all technology stocks is what happens after November's elections. Any progress on tax policy could unleash massive amounts of cash held by tech companies overseas. That, says Paul Wick, portfolio manager of Columbia Seligman Communications & Information fund, could lead to increased share buybacks and higher dividends. It could also encourage mergers and acquisitions, putting some beaten-down names in play.
But unless that happens, expect PC names to struggle as they adjust to a world in which smartphones and tablets are increasingly seen by consumers as capable of providing most, if not all, of the computing power they need.
In short, the traditional economic engine of the personal computer has broken down, and it's unlikely to get back in gear.
Originally posted @ http://online.barrons.com/article/SB50001424053111904034104578058751530288678.html?mod=BOL_hpp_cover#articleTabs_article%3D3
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