Don't Expect Big Stock Gains From These Tech Giants

Moderate growth could cap share upside for Microsoft, Cisco Systems and Apple.

Jan 6, 2014 at 11:30AM

Large stock price gains are often dependent on high growth rates. Companies with little to no current earnings can see their shares skyrocket as long as there is an expectation of meaningfully higher sales or profits to come. On the other hand, firms earning vast sums but with lackluster possibilities may see their stocks languish. Evidence suggests Microsoft Corp. (NASDAQ:MSFT), Cisco Systems (NASDAQ:CSCO), and even Apple (NASDAQ:AAPL) could be facing a future of moderate growth, which might hinder share price appreciation.

Still beholden to Windows
Microsoft's share price has not advanced much since 2007, even after a 42% rise over the last year. Fears about the company's reliance on a Windows-based computer environment not being able to provide noticeably higher growth might be the reason. Recent results appear to support that concern.

Microsoft YOY Growth
    Latest quarter   Latest fiscal year
Revenue                       7%                             4%
Gross margin                       3%                             4%
Operating income                      -3%                            -5%

Microsoft's latest quarter did present some good news. Sales in the company's devices and consumer business, an acknowledged company focal point, grew 4%, helped by sales of the Surface tablet and Bing search advertising gains. Enterprise customer sales really impressed, growing 10% thanks to double-digit growth in SQL server revenue and commercial cloud sales more than doubling.

Future progress might be more difficult, however. Increased exposure to consumer devices could hurt profitability. These products have not been particularly lucrative so far. Device revenues jumped 37% in the last quarter, but gross margins decreased 54% due to increased cost. Microsoft's continued reliance on corporate Windows-related sales is also a concern. A rise in licensing for products like Windows Server, Microsoft SQL Server, and enterprise Microsoft Office was the primary reason for the company's top-line quarterly growth. While the company's Windows franchise is currently beneficial, it's not likely to provide above-average future growth.

Cutting costs as revenues lag
Cisco Systems shares have risen around 22% over the past couple of years, noticeably underperforming the roughly 60% climb of the tech-heavy Nasdaq Composite Index. The lag is possibly due to faltering progress on the company's top line.

Cisco YOY Growth
    Latest quarter   Latest fiscal year
Revenue                       2%                             6%
Gross margin                       2%                             6%
Operating income                       7%                             7%

While revenues haven't advanced much, Cisco has enhanced the bottom line by cutting costs diligently. In the fiscal year ending in July 2014, workforce-reduction plans are expected to impact about 4,000 employees or 5% of the global staff. This latest initiative comes after 9,400 workers were previously shed in 2011.

While those steps have helped offset current sluggishness, better times are not assured. Sales growth in the latest quarter was less than inspiring, and sales composition was a serious concern. A 4% rise in service revenue appeared adequate, but the frail 1% gain in product sales was clearly disturbing. Lagging video and router demand can be blamed for the disappointment. Cisco's past focus on expanding its presence in the Internet video collaboration market and the importance of their router business, which makes up over 20% of revenue. Investors should monitor these weaknesses closely.

Will a saturated iPhone market hinder growth?
Apple has a well-deserved reputation for creating innovative and popular products. The iPhone may be its greatest achievement. The ubiquitous smartphone has helped Apple nearly quadruple revenue since 2009. But as the product saturates most of its major markets, recent figures suggest the days of superlative revenue growth may be over.

Apple YOY Revenue Growth
Fiscal year 4th quarter 3rd quarter 2nd quarter 1st quarter
         2013            4.2%            .01%           11.2%            17.8% 
         2012          27.2%          22.4%           58.7%            73.4%

Finding new iPhone revenue sources has become increasingly difficult. In the latest quarter, more than 60% of the $1.5 billion year-over-year revenue increase appears to have come from a deal with NTT DoCoMo. The agreement, initiated in September, had DoCoMo, Japan's largest wireless provider, offer the iPhone for the first time.

Declining iPhone unit revenue makes finding growth even harder. In the most recent quarter, Apple received roughly $577 per phone sale, down from $581 in the previous quarter and $619 a year earlier. The consequence shows up on the bottom line. In the latest fiscal year, ended in September, product revenue and volume were both up 9.2%, year over year, but gross margins and operating income waned. This trend may continue. Apple's current-quarter guidance suggests revenue of $55 billion-$58 billion and gross margins between 36.5%-37.5%, compared to quarterly revenue of $54.5 billion and a 38.6% gross margin posted a year earlier.

Apple does have some potential bright spots, however. The long-awaited iPhone deal with China Mobile, the world's largest wireless carrier with more than 750 million mobile customers, should help boost sales volumes in the short term, and Apple's huge cash hoard is a major advantage. Carl Icahn's well-known attempts to increase share buybacks and dividend distributions could boost investor enthusiasm if successful.

Summary
History has shown that high-growth prospects can be the key catalyst for meaningful share price appreciation. Companies offering only moderate growth usually find it difficult to achieve big stock gains. The data suggests Microsoft, Cisco, and Apple may each be facing a low-growth future, which would tend to discourage substantially higher share prices. Investors may find it prudent to temper any expectations for outsized gains when considering a purchase of these tech giants.

Looking for a tech stock with big growth prospects?
Opportunities to get wealthy from a single investment don't come around often, but they do exist, and our chief technology officer believes he's found one. In this free report, Jeremy Phillips shares the single company that he believes could transform not only your portfolio, but your entire life. To learn the identity of this stock for free and see why Jeremy is putting more than $100,000 of his own money into it, all you have to do is click here now.

Bob Chandler has no position in any stocks mentioned. The Motley Fool recommends Apple and Cisco Systems. The Motley Fool owns shares of Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers