Instead of a suit and tie or my Silicon Valley uniform of button-down shirt and zippered v-neck sweater, today I’m donning black and white stripes. That’s because I’m refereeing a boxing match between two of the biggest tech legends around.
I’m calling it the Clash of the Tech Titans.
A big slug of profits for your investment portfolio…
Both of these fighters are big – we’re talking market caps in the tens of billions – but these longtime blue chips are more black and blue right now … and are working through major corporate turnarounds. They’re both trying to raise revenue and income in order to send their stock prices higher.
These firms are storied veterans with long histories of major breakthroughs throughout the tech landscape. But both are a bit punch-drunk, having been caught flat-footed in a changing tech landscape.
A one-two punch of the Internet and mobile left these heavyweights looking dazed and confused.
Adding interest to this East Coast vs. West Coast bout: Both these firms installed new CEOs less than three years ago. That means these aging veterans have fresh-faced genius coaches in their corners.
Not a bad combination.
While both of these pugilists have long careers left in them – neither is ready to throw in the towel – I think one of them has a chance to move pretty quickly up the ranks.
That’s why I’ve set up this barnburner.
Before we ring the bell, though, let’s take a closer look at our fighters.
Neither of these heavyweights is a bad investment – like I said, both are solid companies, in it for the long haul.
But one of these pugs just might be a stud – more of an inside fighter – that you should add to your portfolio now.
Today, if you agree with my decision and make that investment, you’ll soon be watching your wealth grow fast…
The Tale of the Tape
In this corner, Big Blue traces its New York roots back more than 100 years. It literally pioneered the dawn of the computer age.
International Business Machines Corp. (NYSE: IBM) weighs in with a market cap of $186.13 billion, 2013 revenue of $99.8 billion and net income of $18 billion. It’s got a price/earnings ratio of 12.64 and a 2.38% dividend yield.
And in the other corner, the Puncher from Palo Alto was one of the very first firms to set up shop in what became known as Silicon Valley. Founded in 1939 by two graduates of Stanford University, the founding partners started up the company in the proverbial one-car garage.
Weighing in with a market cap of $63.63 billion, Hewlett Packard Co. (NYSE: HPQ) reported $112.25 billion in 2013 revenue and a net income of $5.11 billion. Its P/E ratio is at 11.97, and its dividend yield stands at 1.88%.
However, appearances can be deceiving. Those sound like great numbers, but both of these fighters are in turnarounds.
Both have seen declining revenue, income and stock price over the past few years, and I know that neither of these new CEOs is happy with her stock price.
And that’s why I’m refereeing this match. I’ve been a turnaround investor for almost as long as I’ve been around the high-tech world.
I got involved with turnarounds after having dinner in Chicago in 1981 with Lee Iacocca while he was in the midst of saving Chrysler Corp. I later served as a senior adviser to a turnaround investment bank that specialized in high tech and the biosciences.
So, at this point, I have decades of experience evaluating the prospects of a restructuring plan – and how much investors can truly expect to make. After all, a battle’s not worth fighting unless the prize is hefty.
No doubt, turnarounds are one of my “special situations” that can hand investors huge profits… if you know what to look for.
Let’s ring the bell…
IBM comes into this fight as the favorite. Besides its overall heft and gaudy numbers, it’s getting the best press right now.
In fact, if you read mainstream media accounts about IBM back in January, you might have been impressed enough to invest.
The company said it was starting a new business unit focused on its Watson supercomputing system and Big Data – technologies that find profitable patterns out of mountains of unstructured data. Watson, of course, is the computer that became famous in 2011 when it defeated two human contestants on the popular TV game show Jeopardy!
With its Watson subunit, IBM will crunch billions of units of data for corporate clients and to support research and development in pharmaceuticals, biotechnology and publishing. For example, Watson could look at millions of consumer bills and find ways to improve efficiencies, or it could sift through billions of online transactions looking for fraud.
It’s already helping the New York Genome Center map the genomic mutations of brain cancer.
CEO Virginia “Ginni” Rometty, who took over in early 2012, says she’s investing $1 billion in the Watson unit, and she thinks it could generate $10 billion in annual sales within a decade.
Big Blue also said it was launching a new $100 million venture-capital fund to spur developers to write more apps for Watson.
The researchers at IDC forecast the Big Data market will hit $16.1 billion by the end of this year. IDC says the sector is growing six times faster than the overall market for information technology services.
IBM has also made major moves into Cloud Computing, the rapidly growing tech market in which customers pay vendors to host data and applications at remote computer centers they can access via the Web. This year, IBM is spending $1.2 billion on cloud data centers, and the sector produced $4.4 billion in revenue in 2013 – and Rometty expects that number to grow to $7 billion in 2015.
On the surface, it sounded exciting: a company synonymous with power computing taking steps to cash in on the Cloud and Big Data. However, while IBM’s newfound prowess in the Cloud and Big Data is impressive, I don’t believe they make up for weaknesses in other areas.
IBM is no palooka, but Rometty faces some major short-run challenges that you need to understand.
First of all, sales are sketchy at best these days. In this year’s first quarter, sales shrank 4% to $22.5 billion. Alone, that’s not a big deal. But just as technologists do with Big Data, let’s crunch some numbers and see if there’s a deeper pattern at play.
Turns out, that marked the eighth straight quarter in which IBM’s sales either broke even or declined from the year ago period. That’s a poor record extending two full years.
Profits also need to improve. IBM’s net income fell 21% from the year-ago quarter to $2.38 billion. And profit margins also fell by nearly 20%, declining from a 13% margin a year ago to the current 10.6%.
To aid the restructuring, Rometty recently sold IBM’s low-end server business to Lenovo Group Ltd. (OTC: LNVGY) for $2.3 billion. That’s a move I applauded at the time as great for both firms.
But IBM can’t escape the fact that nearly every part of its business has disappointed so far this year, causing some wags to dub it Big Black and Blue.
I, on the other hand, think IBM is still a good stock for the long haul. It can play the rope-a-dope for a while and land its haymaker a few years down the line.
But the question for investors now is which fighter is the better bet over the next couple of years: Big Blue or the Puncher from Palo Alto?
Again, if you just looked at recent headlines, you’d think there are more dark days ahead for Hewlett-Packard. It recently said it plans to fire up to 16,000 workers.
That brings the total number of jobs cut to roughly 50,000 as part of its five-year restructuring plan. Yes, that sounds pitiful – like a series of jabs that lead nowhere – but let’s put that in context.
When Meg Whitman joined the company as CEO in late 2011, HP was a train wreck. In just six years, it had gone through five chief executives, three of whom were fired.
Sales of PCs and printers were plummeting. Its stock price had fallen from near $55 in early 2010 to the mid-$20s.
And just one year into the job, Whitman faced an accounting scandal over HP’s purchase of Autonomy, a British software firm. Though a predecessor led the merger, Whitman was the one who had to tell shareholders HP was writing off some $8.6 billion because of the deal.
By early last year, the stock price dipped almost all the way to $10.
For Whitman and HP, that was a major setback, but hardly a knockout punch. In this year’s first fiscal quarter ended April 30, sales were nearly breakeven from the year-ago period at $27.3 billion.
But profits were up sharply. They rose roughly 18% from the year-ago fiscal quarter to nearly $1.3 billion.
The quarterly results show the overhaul plan is working so far: Restructuring charges fell 62% to $252 million.
Like IBM, HP is moving away from its dependency on hardware and is focusing more on cloud computing.
Whitman recently announced the firm will invest roughly $1 billion in that growth field. And in mid-June, HP announced it will align with industry leader Workday Inc. (NYSE: WDAY) to deliver human resources apps via the cloud.
Moreover, there’s still life in those personal computers – still HP’s largest business segment, with $32.07 billion in 2013 revenue. Earlier this year, HP reported an 8% rise in commercial PC revenue, making a 3% drop in consumer personal computers sting a little less.
And I just got word of HP’s ProLiant DL580 Gen8 server. According to early reviews, it should clean IBM servers’ clock.
In other words, HP may be making big moves into the cloud, but its iron still packs a big punch.
It’s been a long fight, going 10 rounds, with no knockouts. But HP knocked IBM down a few times and kept Big Black and Blue on the ropes for the last couple of rounds of this Clash of the Tech Titans.
And the judges – market investors – agree. It’s a unanimous decision: HP has a lot more momentum than does IBM… and the stock performance shows it.
Trading at $180, over the past two years, IBM’s stock has fallen nearly 6%, compared with gains for the Standard & Poor’s 500 of more than 48%.
By contrast, Hewlett-Packard trades at nearly $34. And over the last two years, the stock is up more than 73%, beating the broad market by roughly 50%.
And I think HP has a greater chance of outperforming the market over the next two years. It’s going in with a solid combination of power punches.
Look at it this way. If IBM just gets back to its five-year closing high of $214.92, set on March 11, 2013, we’d be looking at an upside of about 19%.
But if HP just gets back to its five-year closing high of $53.87, reached April 5, 2010, we’d be talking about a gain 59%.
Thus, as special situations go, Hewlett-Packard seems to be the clear winner over the next two to three years. In fact, HP looks like it will be the best performing legacy tech stock over the next year.
When it comes to profits for stockholders, Hewlett-Packard is proving itself to be the Comeback Kid.
By the way, the winner of my Clash of the Tech Titans isn’t the only investment that I’m watching closely right now.
I’ve got my eye on a technology that is producing products that are nothing less than miraculous.
I’m referring to “LifeChips.”
This sector is growing faster than any technology trend in history. One research firm projects the market to surge 29,000% in the next three years.
LifeChips and related technologies are creating entire new industries overnight, and in a wide range of applications. Medicine, health and fitness, entertainment, military operations, industrial manufacturing…
All told, we’re looking at an eye-popping $50 billion in new wealth.
And I want to make sure you get a chance to get a piece of it.
I’ve put together an amazing way for you to learn everything about it. Take a look here and you’ll see what I mean.
Have a great Independence Day. I’ll see you next week.