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Microsoft, IBM thrive amid tech selloff

Their core businesses have benefitted from work-from-home trends and the technology needed to facilitate that.

Amid the selloff in technology stocks, some companies have emerged from the crash even stronger.

Their core businesses have benefitted from work-from-home trends and the technology needed to facilitate that. They have taken advantage of conditions to acquire competitors and strengthen their businesses.

 Here are updates on two that fall into this category.

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

Performance:  The shares are down 24% year-to-date at the time of writing to US $258 amid the general tech retreat.

Developments & Discussion:  Microsoft continues to benefit from its strategic shift to cloud computing which offers companies a way to store and access information remotely. It reported strong fourth quarter earnings, led by its Azure cloud business  and sees double digit revenue growth for the year.  

For the three months ended June 30, revenue was $51.9 billion, 12% higher than a year earlier. Net income rose to $16.7 billion, or $2.23 per share, a 2% increase.

Regulators continue to examine Microsoft’s $68.7 billion offer for video game developer Activision Blizzard. The gaming component of Microsoft’s business is almost 11% of revenue and would grow considerably with the acquisition, bolstering its position.

Microsoft is seeing results from an augmented reality (AR) contract with the Pentagon it was awarded in March 2018 worth as much as US$22-billion over 10 years. It is supplying 120,000 (AR) headsets to the U.S. Army based on its HoloLens device. The first sets of a batch of 5,000 have been delivered following promising testing.

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 Subsequent to its earnings release, Microsoft announced a round of belt tightening, saying it will shrink its workforce by 1% in the coming year. That is 18,000 people out of a total of 180,000.

Dividend: Microsoft’s dividend increased in November, 2021 to $0.62 per share quarterly. It yields 0.89% at current prices. 

 International Business Machines (NYSE: IBM)is one of the world’s largest technology companies. It gets 60% of its revenue outside of the U.S. and competes with Microsoft in cloud computing and data analytics.

Performance: IBM’s shares are down 4%  year-to-date at the recent price of US $128.

Developments:  IBM performance beat expectations in its latest quarter, but as with Microsoft, it warned that a strong US dollar is impacting its profitability.  However, despite a weakening economy it does not see customers cutting back on spending.

IBM  said on a conference call the strengthening dollar shaved $900 million from quarterly revenue and costs associated with closing its Russia operations will affect near-term results.  

Even so, it expects single-digit revenue growth for the year. Strong demand at its consulting and infrastructure businesses and cloud business helped quarterly revenue rise 9% to $15.54-billion. Excluding extraordinary items, earnings rose 44.6%, to $2.11 billion    

Outlook & discussion: IBM continues to gain from a restructuring, now in its fourth year that  has seen it shed older, low growth services and take aim at higher-margin areas like the cloud, AI, and security.  

  Dividend: IBM has increased its dividend for 25 years in a row. The quarterly payment rose 1 cent to $1.63 with the April  payment. It yields a high 5.09% but seems secure.  

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This is an edited version of article that appeared in the Internet Wealth Builder on Aug. 29, 2022.  For information on how to reprint this article please view this page.

Adam Mayers writes about investing and personal finance. He is a contributor to the Globe & Mail’s Globe Advisor and a contributing editor to Gordon Pape's Internet Wealth Builder newsletter. Adam was Business Editor and investment columnist at The Toronto Star and is the author of six books.

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