As a whole, the technology sector performed reasonably well in 2012. According to Morningstar, the sector as a whole was up more than 21% through Dec. 28. You certainly wouldn't guess that from many of the headlines this past year, bemoaning the poor performance of several technology leaders, including Facebook (NASDAQ:FB) and Nokia (NYSE:NOK).
Compared with those stocks, Microsoft (NASDAQ:MSFT) is the darling of the group, with shareholders "enjoying" its 2.3% positive return in 2012, including today's pre-market trading. The upside of these poor results for value investors is that all offer sound balance sheets, strategic shifts in direction, and technologies that could make 2013 a banner year.
It would be easy to focus on Facebook's most recent hiccups -- and there have been a couple of late -- rather than consider the positive steps its taken to capitalize on its billion users.
The users of Facebook's Instagram photo-sharing service have, not surprisingly, been up in arms since it announced its intention to use customers' pictures on the site for advertising purposes. Some recent Instagram usage data suggests that active users have declined precipitously since the "incident" -- though, according to research firm AppData (the same firm responsible for the info showing a decline), Instagram is at the top of Facebook's total, and recently downloaded, app list. Regardless, it's safe to say Instagram has a PR problem.
Not to be outdone, Instagram parent Facebook announced that it's exploring the idea of charging users $1 for using the new messenger service, specifically sending notes to "non-friends." Two problems with the notion of charging for messages: No. 1, a dollar a message? That's awfully steep. No. 2, any fee incurred by longtime users for what is perceived to be a gimme -- messaging -- isn't likely to go over well.
So why is Facebook on the list of tech values for 2013? In the past several months, Facebook has introduced a new Google (NASDAQ:GOOGL) Android messenger service for smartphones, new apps for Apple's (NASDAQ:AAPL) iPhones, a new social jobs application, advertising tools for its business customers, and Facebook Gifts, and it's also talking with Microsoft about its advertising ROI and tracking tool, Atlas Solutions.
Also, the number of Facebook users accessing its service via mobile computing alternatives is exploding, and Facebook is positioning itself to profit from the transition. Questions about how Facebook is going to generate alternative revenue streams from its billion users are being addressed, and will continue to pay off in 2013.
Nokia and Microsoft
Since Nokia CEO Stephen Elop first announced his intention to hedge his bets on the smartphone market, specifically Microsoft's Windows OS, the die was cast. Though down 21% year to date, Nokia shareholders have enjoyed an 84% jump in stock price the past six months. Nokia remains a stellar tech value in 2013, even after its stunning rise in share price of late, because, like Facebook, its upside is based on several positive trends, all of which should continue to pay off in the new year.
Nokia's phone lineup, from its high-end Lumia 920, entry-level Asha, and its 620 -- the last expensive smartphone available running Windows 8 -- will continue to drive total sales volume around the world. In other words, Nokia's smartphone success isn't entirely reliant on unseating Apple next month, or even next quarter. And its potential new distribution relationship with Verizon (NYSE:VZ) -- as per Elop's CNET interview -- and new partner China Mobile (NYSE:CHL) subsidizing Nokia's 920T offering for its 700 million users, are major arrows in Nokia's quiver.
Like Nokia, Microsoft obviously has a lot riding on its Windows 8 rollout, and not only smartphone alternatives from the likes of Nokia and HTC. Its new Surface tablet is either a solid sales performer or a complete disaster, depending on the day, and which news stories you choose to believe.
The success, or failure, of Windows 8 certainly weighs on Microsoft's stock performance, and that's not likely to change in 2013. But what too often gets lost in the shuffle is exactly what makes Microsoft such a great value moving into the new year -- multiple revenue opportunities, many in explosive new markets. Yeah, Microsoft's entrees into mobile have drawn all the attention, but its cloud computing solutions, gaming unit, and server management solutions are significant revenue drivers, too.
With all that, Microsoft continues to trade on the low end of its sector's earnings ratios, it's sitting on $66.6 billion in cash, and it pays a nearly 3.5% dividend yield. Microsoft, like Nokia and Facebook, is poised to lead the tech breakout coming in 2013, making them ideal alternatives for patient value investors.