The stock market is off to a poor start in 2014, remaining in the red after the first six starts in the new year. A search for possible reasons turns up nebulous results, but changes taking place in the software industry should be discussed as a factor.
As Internet connection speeds improve and more software moves into the cloud, numerous changes are taking place. Consumers prefer the cheaper, faster-booting and virus-free Chromebooks over Windows PCs.
PC shipments fell 10 percent in 2013, which made for poor holiday sales and indicated how consumers and businesses are moving away from desktop computers and flocking to notebooks and mobile devices.
The demise of the PC market is evident in Microsoft’s plan to end support for its 13-year-old Windows XP operating system in April. Also contributing to the decline are the Microsoft Windows operating system users who are switching to PCs powered by Google’s Chrome operating system. Google doesn’t charge a licensing fee to use its operating system.
Marking further changes to the PC market, Toshiba Corp. joined the growing list of Chromebook vendors when it unveiled its Chromebook system at the Consumer Electronics Show in Las Vegas last week. Toshiba’s Chromebook will compete with models from all major PC manufacturers.
Following is an update on two Town Crier “50” stocks impacted by changes in the software industry.
• Microsoft Corp. (MSFT; $35.26) is still looking for a new CEO. When Ford Motor Co. CEO Alan Mulally asked that his name be removed from consideration for Microsoft’s CEO position last week, the stock price dropped 2 percent.
Whoever is hired will be a breath of fresh air after 13 years of Steve Ballmer’s tenure – the stock has dropped 38 percent since he took over.
Microsoft’s strongest growth driver is its commercial cloud service. Cloud services revenue grew $261 million, or 103 percent, during the first quarter of the current fiscal year compared to last year’s first quarter. Microsoft already has two cloud businesses – Azure and Office 365 – that are growing rapidly and account for more than 1 billion in annual revenues.
Microsoft’s strong financial position allows it to support quarterly dividend payments, repurchase its own shares and buy other companies. The company just acquired Parature, a developer of a cloud-based customer support platform.
Last month Microsoft announced a $7.5 billion transaction to acquire Nokia Corp.’s mobile device business, enabling Microsoft to compete with Apple and Google in the smartphone market. Dividend income is an important factor in my investment decisions, and Microsoft pays a nice dividend and has enough money to buy its way into a position to challenge Google and Apple.
• Cisco Systems Inc. (CSCO; $22.32) is another company that has taken a beating lately but still has long-term appeal. The share price tumbled more than 15 percent in the month following the release of its November earnings report, when the company revealed that sales in the following quarter would fall as much as 10 percent.
Cisco’s core business – providing a means of connecting devices to one another with security – will continue to grow. However, the company claimed its gloomy outlook via weakness in emerging markets.
The stock yields a dividend of 3.3 percent, roughly four times the industry average. Dividend stocks can make you rich even when they don’t become high-flying growth stocks.
Clyde Noel is a Los Altos Hills resident and investor in stocks. He has a small exposure in Microsoft and Cisco stock.