In the investment world of "what have you done for me lately," a stock's long-term prospects often take a backseat to more immediate concerns. While that mindset can, and does, often negatively impact near-term performance, it also opens the door for investors in search of long-term growth. Here, three of our Foolish contributors argue that industry stalwarts Hewlett-Packard (HPQ -0.25%), IBM (IBM -0.89%), and Microsoft (MSFT -1.84%) have all fallen out of favor for all the wrong reasons.
Dan Caplinger (Hewlett-Packard): One of the most topsy-turvy tech stocks in recent years has been Hewlett-Packard, with the tech giant having made a huge number of major strategic moves in order to try to find its path toward a new and sustainable paradigm. Having identified the coming challenges to the PC market, Hewlett-Packard sought to move away from its former hardware focus to embrace new, higher-growth areas like servers and enterprise software. Yet investors have been frustrated with the slow pace of CEO Meg Whitman's transformation, arguing that HP is falling behind. Even though the stock has soared in the past couple of years, it remains about a third below where it traded as recently as early 2011.
Late last year, HP said it would split itself up into two separate units, one containing its core consumer-hardware and printing businesses and the other its enterprise-oriented software and hardware services. Naysayers have noted that Whitman's insistence on playing a role in both companies will prevent them from being truly independent, but they underestimate the capacity for those working with her to assert their own visions and push the company forward. In the long run, Wall Street's ambivalence about HP should prove misplaced, and both portions of Hewlett-Packard should find greater success in the future.
Andrés Cardenal (IBM): IBM is not a very popular stock on Wall Street right now. Because of the company's transformation process and a series of challenges coming from technological changes, revenues have been practically stagnant over the last several years. However, there are strong reasons to believe that these problems could create a buying opportunity for investors in IBM stock.
Trends such as cloud computing and software-as-a-service are changing the competitive dynamics in the industry, and IBM is facing considerable competitive pressure. In this context, IBM announced a 1% decline in revenues adjusted for divested business and currency fluctuations during 2014.
Not everything is bad news, though. Sales from the "strategic imperatives" segments -- meaning cloud, analytics, mobile, social, and security technologies -- grew by a healthy 16% in 2014, and that was in spite of strong currency headwinds. Taken together, these segments represent 27% of total revenues, and since they will most likely continue outgrowing the rest of the company in the coming years, their contribution to overall growth rates should continue increasing over time.
IBM has an amazing track record of capital returns, it reduced its average diluted share count by more than 40% in the last decade, and it has raised dividends by 450% through that period. Besides, the stock is attractively valued: IBM trades at a forward P/E ratio around 9.3, nearly half the average valuation for companies in the S&P 500 Index.
There is considerable uncertainty surrounding IBM in the short term, but, from a long term point of view, upside potential should more than compensate for the downside risk.
Tim Brugger (Microsoft): By most accounts, the culprit for Microsoft's poor showing this year is recent declines in Microsoft's Windows Pro and non-Pro revenue, both of which dropped 13% last quarter. A slower than expected PC market, which affected the refresh of Microsoft's XP OS, didn't help matters, nor did pricing pressures.
Those are legitimate concerns, particularly for Wall Street's near-term outlook. However, PC-related concerns ignore several aspects of CEO Satya Nadella's on-going transition to a mobile-first, cloud-first business model. In those key areas, Microsoft is right on track.
First and foremost, Microsoft is gaining market share in cloud-related sales by leaps and bounds. For the sixth consecutive quarter cloud revenues jumped triple digits, and are now on pace to generate $5.5 billion annually. Unlike cloud hosting solutions, Microsoft recognizes the real opportunities lie in software-as-a-service and related products. And that's where Nadella and team shine.
On the mobile front, Surface revenues broke the $1 billion barrier for the first time last quarter, led by Microsoft's Surface Pro 3. Sure, the tablet market is slowing, but there's even a silver lining to that mobile downturn: Of the big three tablet OS providers, according to IDC, Microsoft is the only one expected to grow market share over the next 5 years.
At some point, investors are going to recognize this isn't your father's Microsoft. When Wall Street begins to measure Microsoft on what counts -- cloud and mobile results -- patient investors who buy-in now will reap the benefits. And Microsoft's 3% dividend yield should make the wait even easier to tolerate.
