While investors get caught up in the hype of new technology products and services, some of the other tech companies are often left out in the cold as the masses flock to buy the next growth name. The old tech giants that are sometimes forgotten due to the inordinate amount of coverage that more ‘sexy’ and exciting tech names such as Facebook, Apple, and Groupon, include deep value picks Cisco Systems, Inc. (NASDAQ:CSCO) and Intel Corporation (NASDAQ:INTC). These and other ‘unsexy’ tech names operate much of the behind-the-scenes technology that powers company infrastructure and technology devices, from enterprise software/hardware to networking and communication products. Each also has a market cap at or above the $100 billion mark, making them true tech giants.
Cisco expects to continue to see solid growth in fiscal year 2013 with revenues expected to be up 6.5%, then up 6.7% in 2014. This includes product demand increases for data centers and communication software. Cisco is gaining share in routing and also driving customer acquisition with strides in offering system wide solutions in the enterprise networking arena. What is expected to help drive Cisco’s long-term growth is a continual rise in bandwidth usage, which is a product of rising populations and prospering nations. Cisco saw billionaire Jim Simons betting on the tech company in 3Q, with a new position of over 13 million shares (check out Jim Simons’ new picks here).
Intel is a global chipmaker that has seen weakness in its shares – down 15% year to date – on uncertain PC demand. The likes of tablets and smartphones have been slowly eating into the market share for conventional PCs and revenues are expected to come in relatively flat for 2012. Slowing PC demand will in part be countered by data center growth, but the outlook for Intel remains bleak, with expected 2013 sales to come in at only 1.3% higher than 2012.
Oracle Corporation (NASDAQ:ORCL) is another less sexy tech name that offers enterprise software and hardware products. Oracle expects modest growth for fiscal 2013 of only 3%, but its product diversity has allowed the company to perform well on a stock basis with its share price up 25% year to date. Oracle has a solid growth avenue in software licenses, with the segment expected to be up 5% in 2013, but also has the opportunity of better hardware market penetration with the full integration of its Sun Microsystems’ acquisition. The recent acquisitions – totaling $3.5 billion so far this year – in the cloud computing space will be a fundamental driver of the long-term growth for Oracle.
International Business Machines Corp. (NYSE:IBM) is quite the diversified IT company with five different segments. Even with the breadth of service offerings, IBM is expected to post sales down 2.5% in 2012, but growth in emerging markets should put IBM to a 2.5% sales growth in 2013. This less-than-stellar revenue growth makes IBM a questionable growth investment, but its solid balance sheet and ability to generate cash flow is a reason Warren Buffett loves the company. IBM continues to be one of billionaire Warren Buffett’s favorite stock picks – with Berkshire having nearly 20% of its 13F invested in the tech company (see Warren Buffett’s latest picks).
One of the relatively new names, compared to the trading history of the other tech giants, is SAP AG (NYSE:SAP), which started trading on the NYSE in 1998. SAP is one of the better growth stories of the past and the future. Of our five tech giants, SAP is up the most by far over the past ten years at 280% – versus the next closest stock, Oracle at only 185%. The enterprise application company expects future growth to be driven by its in-memory database technology. Other key products for SAP include mobile apps for real time database analysis and cloud computing. First half fiscal year 2013 results showed software sales up 12% – beating consensus by four percentage points, and orders were up 36% from the first half last year. Billionaire Ken Fisher – founder of Fisher Asset Management and Forbes columnist – was the top fund owner of both SAP and Oracle during 3Q (check out Ken Fisher’s newest picks).
From a valuation standpoint, it appears there is quite a range for our five ‘unsexy’ tech stocks, with some showing solid growth potential and others exhibiting value-opportunity characteristics. Outlined below are some key metrics for our five tech stocks:
| Company | Price-to-Earnings | Price-to-Sales | Long-Term Growth Rate (expected) | Dividend Yield |
| SAP | 20x | 4.8x | 12% | 1.2% |
| Oracle | 15x | 4.3x | 12% | 0.8% |
| IBM | 14x | 2.1x | 10% | 1.8% |
| Intel | 9x | 1.9x | 12% | 4.5% |
| Cisco | 13x | 2.2x | 8% | 2.9% |
As expected, SAP trades at a premium valuation given its outsized growth potential – some of which we believe is not fully accounted for in their long-term growth rate. We believe investors can still find value in SAP, more so than is currently being offered by Oracle. On the low end of the valuation spectrum is Intel, which also has one of the more robust growth rates – making it a ‘growth at a reasonable price’ play, but we remain concerned it could be a value trap should PC demand continue its slide. Intel is also the big underperformer of our five tech stocks; over the past ten years Intel is relatively flat in terms of returns.
Although it appears to be a middle-of-the-road company, where it trades in the mid-range of its peers on a valuation, growth and dividend basis, we tend to make the bet with Warren Buffett that IBM has an industry-leading position and the wherewithal to boost its dividend in the near future. Cisco trades near the bottom of our tech stocks on a valuation basis, but for good reason given its less-than-stellar expected growth rate. If Cisco could make a strategic acquisition, particularly in the cloud computing sector, we believe the tech company could rapidly move up the list. Three of our five ‘unsexy’ tech stocks are on our list of top ten tech stocks loved by hedge funds.
