Microsoft and IBM have pandemic advantage

Technology stocks have shrugged off pandemic worries and staged the V-shaped recovery everyone hoped would be the case for the broader economy.

IBM and Microsoft are among those benefiting from the lockdown with their focus on cloud computing and data storage. As internet use has soared, companies that store the information and provide related services have done well.

Microsoft (NDQ: MSFT)  Closed Fri. June  26 at $196.33.  (All figures in U.S. dollars.)

Background: Microsoft is the world’s largest software company, best known for its Windows operating system, which runs about 90% of the world’s personal computers and its Office suite of applications. Microsoft also owns LinkedIn, Skype, and markets the Xbox gaming system.

Performance:  Microsoft’s latest quarterly earnings, reported Apr. 29, were strong, beating estimates for revenues and profit. Revenue was $35 billion and net income was $10.8 billion. Earnings per share of $1.40 were 23% higher than a year ago.

The shares are up 28% year-to-date.

Discussion & developments:  Microsoft continues to build on its 2014 shift to cloud computing which offers companies a way to store and access information remotely. Cloud revenue growth slowed in the latest quarter and may slow again as the coronavirus affects its customers. But cloud growth is in its early stages and the pandemic is acting as an accelerant.

On other fronts, Microsoft introduced an updated version of its Edge internet browser this month. Edge (#2 global browser) replaces Internet Explorer (IE) and is taking aim at Google Chrome which is #1. The  new features make navigation easier, reduce memory use and speed up performance.

Microsoft’s Teams software is also growing. It competes with  Slack Technologies (NYSE:WORK) and Zoom Video (NDQ:ZM)  both of which have gained during the stay-at-home video conferencing boom. Team is Microsoft’s platform that competes in that space combining workplace chat, video meetings, file storage, and application integration.

Microsoft has been on the acquisition trail. Its third major major purchase of the year is $1.65 billion acquisition of ADRM Software Inc., based in North Carolina.  ADRM sells the data organizing templates, the  blueprints companies use to organize information.

Dividend: The dividend was last increased in December and the $0.51 per quarterly payment yields 1.05% at current prices.

IBM (NYSE: IBM)   Closed Friday June 26 at $117.19. All figures in U.S. dollars.

 Background: International Business Machines is one of the world’s largest technology companies with operations in over 175 countries. It gets 60% of its revenue outside of the U.S. and competes with Microsoft in cloud computing and data analytics.

Performance: IBM’s latest quarter beat  forecasts for revenue and profit although both were lower. Revenue of $17.57 billion was down 2.4% and net earnings of 1.18 billion were off 26%. The shares are down 11% year-to-date and down 2.5% since being recommended last January.

Outlook & discussion:  IBM’s is a big company with a history of adapting slowly and methodically. It is making investors impatient as it sheds older, low growth software and consulting services and aims at higher-margin areas like the cloud, AI, and security.

The deemphasis on mature businesses has reduced revenues, while investing in new operations has hurt profit.

The biggest bet is the $34 billion spent in 2018 on Red Hat Inc., the open source software company it purchased in 2018.  Red Hat users can make changes to its software under license and then resell it, which helps IBM expand its artificial intelligence and Blockchain initiatives.

Taken together the moves have pushed IBM’s price to earnings ratio down to an attractive 12 versus 32 for Microsoft.

IBM has also managed to reduce its debt by 10% from its peak after the Red Hat purchase.

Dividend: IBM has been dogged in its maintenance of dividends. It has increased its dividend for 25 years in a year in a row. The quarterly payment rose 1 cent to $1.63 with the June payment and yields a high 5.4%.

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 (This article appeared in the June 29, 2020 edition of the Internet Wealth Builder  where the author is a contributing editor.)