The real beauty about IBM is its ability to return cash to shareholders. The tech giant has been levering up its balance sheet to buyback stock for over a decade; now its return on equity is upwards of 80%. The trend is expected to continue. Over the next five years, management expects to buy back shares worth $50 billion.
PC weakness
One of the key tailwinds forcing a number of companies over to the SaaS market is weakness in PC sales. Microsoft Corporation (NASDAQ:MSFT) gets some 50% of revenues from the PC industry. With an ever-slowing PC market demand, this can be a troublesome stat. As part of Microsoft Corporation (NASDAQ:MSFT)’s strategy, the tech company is looking to mobile and tablets.
Microsoft did enter a partnership with Oracle to make certain products inter-operable. The two companies will work together to solve technical issues, which should give Microsoft some exposure to customers focusing on the move to the cloud. Oracle has a similar deal with salesforce.com, inc. (NYSE:CRM).
Intel Corporation (NASDAQ:INTC) is seeking some of the biggest pressure related to weakness in the PC market. Intel Corporation (NASDAQ:INTC) dominates the microprocessor market, shipping over 80% of microprocessors globally.
Revenue is expected to be flat in 2013, after a slight decline in 2012. Intel is under similar pressure as Microsoft, where the shift to mobile and tablets is putting serious pressure on the company’s top line. However, Intel is turning to data center growth, which is a play on tech companies move to the cloud.
Hedgie trade
Going into the second quarter, there were a total of 49 hedge funds long IBM. Warren Buffett of Berkshire Hathaway Inc. (NYSE:BRK.B) has the largest position among major investment funds, worth over $14 billion and making up 17% of Berkshire’s 13F portfolio (check out Buffett’s high upside picks).
Meanwhile, Oracle had 69 hedge funds owning the stock, where Eagle Capital Management had the largest position, worth $967 million and making up 5.8% of its 13F portfolio (see Eagle’s top stock picks).
At the end of 1Q, Microsoft had some of the most hedge fund interest in the tech space, with 89 hedge funds long the stock. This includes Donald Yacktman’s Yacktman Asset Management, with the largest position among hedge funds, worth $1.1 billion and comprising 6% of its 13F portfolio (check out Yacktman’s newest picks).
The bottom line
With the exception of IBM and its ridiculous 80+% return on equity, Oracle is outshining its major peers on an ROE basis.
Although Oracle’s push to the cloud was a bit delayed, the company appears to be catching on quickly. I think SaaS will be a big contributor to earnings growth going forward, and I expect Oracle to continue throwing off cash to its shareholders.
Marshall Hargrave has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines (NYSE:IBM). and Oracle.
The article Kicking the Competition’s SaaS originally appeared on Fool.com and is written by Marshall Hargrave.
Marshall is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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