Technology stocks tend to be riskier than our other recommendations in the Manufacturing & Industry sector. That’s mainly because innovations can quickly make today’s products obsolete.
To cut your risk, you should focus on well-established tech firms with special advantages, such as plenty of cash flow to invest in new products. Below we report on one market leader we follow regularly in Wall Street Stock Forecaster.
MICROSOFT CORP. (Nasdaq symbol MSFT; www.microsoft.com) gets most of its revenue from Windows, the software that powers over 90% of the world’s computers, and its Office suite of business programs.
Last week Microsoft ended months of speculation by hiring a new CEO. Satya Nadella, a 22-year veteran of the company, becomes the company’s third CEO after Bill Gates and Steve Balmer.
In the meantime, more users are upgrading their systems because Microsoft will soon stop supporting Windows XP, which it launched in 2001. At the same time, demand for its server software and cloud computing services is rising. In addition, the company launched new versions of its Xbox game console and Surface tablet before the Christmas shopping season.
These strengths lifted Microsoft’s revenue by 14.3% in its fiscal 2014 second quarter (which ended December 31, 2013), to $24.5 billion from $21.5 billion a year earlier. Earnings gained 2.8%, to $6.6 billion, or $0.78 a share, from $6.4 billion or $0.76.
Tech stocks: Microsoft to close deal for Nokia’s cellphone and smartphone business in early 2014
The company’s long-term debt of $20.7 billion is just 7% of its market cap. It also holds cash and investments of $98.6 billion, or $11.87 a share. That gives Microsoft flexibility to keep developing new products: its research spending rose 8.7% in the latest quarter, to $2.7 billion (or 11.2% of revenue) from $2.5 billion (or 11.8%).
The company’s healthy balance sheet will also help it fund its upcoming $7.2-billion deal to buy Nokia Corp.’s (New York symbol NOK) cellphone and smartphone operations. Microsoft aims to close the deal in early 2014.
Nokia is the only major phone maker that uses Microsoft’s Windows Phone software. Microsoft believes the Nokia purchase will help it better market these phones, and encourage software makers to write Windows Phone programs, or apps.
Without any contribution from Nokia, Microsoft will probably earn $2.66 a share in fiscal 2014. The $1.12 dividend yields 3.0%.
In the latest edition of Wall Street Stock Forecaster, we look at Microsoft’s prospects in the highly competitive smartphone market and whether its Nokia purchase will improve its ability to compete with Apple iPhones and Google Android devices. We conclude with our clear buy-hold-sell advice on this stock.
If you’re a member of Pat’s Inner Circle and you’d like to ask a question about today’s article, please go to the question page reserved for you (be sure you’re logged in first). Click here to ask your question.
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The six-month search for a CEO at Microsoft brought negative reactions from many commentators. Have you had stocks that rose, or fell, significantly after hiring a new CEO? Have you ever bought or sold a stock specifically because the CEO’s performance seemed particularly good—or bad?
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