Some analysts say that there is no upside in big-cap firms, but I disagree. Below you will find a succinct analysis on three behemoths within the tech segment that offer compelling growth prospects and very attractive valuations. These are Cisco Systems, Inc. (NASDAQ:CSCO), Microsoft Corporation (NASDAQ:MSFT) and Oracle Corporation (NASDAQ:ORCL). Let’s take a look at each of them.
IP stands for Intelligent Pick
Cisco Systems, Inc. (NASDAQ:CSCO) is the global leader in the networking business, providing a wide array of Internet-Protocol (IP)-based solutions for enterprises, educational institutions and government agencies. Although its reputation of profitability–even through tough macroeconomic patches–precedes it, the tech industry requires constant innovation. Going forward, the company is placing its bets on the intelligent networks segment and other related fields.
As stated by Morningstar analysts, important scale advantages coupled with high switching costs for customers and “a reputation as the go-to provider of enterprise-class networking equipment give Cisco Systems, Inc. (NASDAQ:CSCO) a durable competitive advantage in its core markets of routing and switching.” Furthermore, hefty investments in product innovation keep it ahead of its peers, excreting pressure over smaller companies.
High-end markets like telecom and cable providers are tending towards the use of IP-based networks as well, and Cisco Systems, Inc. (NASDAQ:CSCO) holds a comfortable lead in these segments. Other segments are being explored by management and promise to provide plenty of extra profit over the upcoming years. Some of these are its services, smart connected communities, small business and smart grids (for secure energy management) segments. Acquisitions will also play a major role in the years ahead, and as Oracle is currently going through a purchase spree, the benefits will be seen over the next several quarters.
As Internet traffic increases, Cisco Systems, Inc. (NASDAQ:CSCO) seems poised to grow. Analysts expect the firm to deliver an average annual EPS growth rate in the range of 8%-10% over the next five years, and even these projections could prove conservative. Trading at 13.4 times earnings, not even half the industry average, while offering great margins, returns and dividends, I’d recommend buying and holding on to this stock; the upside potential is high and the risks are low.
The way Bill Gates got rich
Most of you already know that Microsoft Corporation (NASDAQ:MSFT) develops, manufactures, licenses, sells, and supports software products. And, although many see it as a declining Goliath, I see plenty of potential left in a firm that enjoys one of the widest moats in the industry. Its late, but a strong incursion in the mobile and cloud storage segments promises to provide new life to the company.
In response to the challenges imposed by competitors like Apple and Google, Microsoft Corporation (NASDAQ:MSFT) has launched Office 365, Windows 8, the Surface tablet, and the Windows Store, hoping to recuperate regain some lost ground and to increase synergies and product interaction. Moreover, the recently announced launch of a version of Microsoft Corporation (NASDAQ:MSFT) Office for iOS proves Microsoft Corporation (NASDAQ:MSFT)’s intention to fight against the advance of its rivals.
Other segments, particularly the server and gaming divisions, along with other internet businesses like its Bing search engine, are also expected to contribute to revenue growth over the upcoming years. Mergers and acquisitions are not to be overlooked either; having played an important role in the past times (as evidenced by the Skype purchase), they will sure be important for the firm’s future.
Trading at 17.8 times its earnings, a 7% discount to the industry average, while offering substantial dividend yields, a moated business model and plenty of growth catalysts, I’d recommend buying this stock before valuation becomes less attractive.
Check with the Oracle: forecasts are good
Oracle Corporation (NASDAQ:ORCL) is a leading provider of enterprise software, hardware products, and services. Due to report earnings on Thursday, July 20, its stock price might go up. However, currently trading at 15.7 times its earnings, an 18% discount to the industry average, an attractive entry point is open for investors. With healthy margins and an above average growth history, I´d recommend buying and holding on to this stock while it is still valued cheaply.
The firm’s database and middleware business, which represent about 75% of new software license revenues, provide it with high client stickiness; steep switching costs and risks make companies continue buying Oracle Corporation (NASDAQ:ORCL)’s products and services. Moreover, its dominance in this sector also makes it the most popular platform amongst Software-as-a-Service developers, increasing incentives for clients to choose the company’s products, creating a virtuous circle (Morningstar).
Unlike many of its main competitors, Oracle Corporation (NASDAQ:ORCL) has been making an incursion in the cloud computing industry too, looking to create further motivations for clients to stick with Oracle Corporation (NASDAQ:ORCL), while slowly migrating to cloud-based platforms (without incurring in much trouble). Like the SaaS segment, Cloud-based services profits are expected to increasingly contribute to revenue in the upcoming years. Other innovative products, including the business intelligence and big data analytics segments, should also help drive Oracle Corporation (NASDAQ:ORCL)’s market share.
Acquisitions have and will continue to play an important role as well, as proven in the past by the purchase of some important companies like PeopleSoft Inc. and Sun Microsystems. A strong cash position will not only serve the purpose of expanding through acquisitions, but also returning value to investors through share repurchases and dividend payouts.
Bottom line
I have briefly analyzed the future prospects of three tech behemoths and arrived to the conclusion that, at current valuations, they are good picks for your investment portfolio. Buy while they are cheap and prepare to enjoy the upside for years.
The article 3 Long Ideas In The Technology Industry originally appeared on Fool.com and is written by Victor Selva.
Victor is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
