Thu10302014

Business & Real Estate

Dow trading in wide range again

After two days of downward volatility by Cisco Systems Inc. and IBM Corp., the Dow Jones industrial average traded in a narrow range last week. The Dow gained well over 110 points early Friday, but it was back to zero by noon.

Both of these Town Crier “50” stocks fell more than 1 percent to lead the Dow’s losing components. With Cisco, IBM, Microsoft Corp. and other companies aging, is there a changing of the guard in the technology industry?

Throughout the technology sector, these old-line stocks have repeatedly embraced the potential of cloud computing to change the parameters of the desktop computer, but they lose control of their work product.

Today, ambitious new tech companies are looking for ways to retain control by offering customers the ability to take advantage of technical resources without having to buy them outright. These new technical enterprises get their revenue from periodic access fees rather than one-time sales revenue.

The Motley Fool reports that the challenge IBM, Cisco, Microsoft and other well-established tech companies face is the huge cost of transitioning to cloud computing programs. What is clear, no matter the direction of technology for older companies, is that there will always be winners and losers – and IBM and Cisco will have to work hard to avoid being left behind.

The first quarter ended Monday, and once quarterly reports begin to appear, investors better buckle up. The tech market has provided plenty of reasons to sell off, but the overall direction is still positive and the decliners are tech and small-cap names.

• Microsoft Corp. (MSFT; $41.44) is a well-established tech company with an aggressive vein. Newly appointed CEO Satya Nadella, in his first public announcement, said the company is now making its popular Office software available on Apple’s iPad. In addition, Microsoft’s future strategy will focus on mobile and cloud services.

The push to boost Microsoft’s sales aims to make its products available for a greater combination of devices by increasing cloud- and Internet-based services, including gadgets made by competitors. In promising more new products, Nadella vowed that “over the next three to four weeks, you will get a much better view of our innovative agenda.”

Beginning this week, Office 365 subscribers can add the iPad as one of their chosen devices in their subscription benefits, enabling them to create and edit documents with Word, PowerPoint and Excel for iPad. Office 365 is Microsoft’s fastest-growing commercial product, with the popularity of the subscription service rising.

Founded in 1975 in Redmond, Wash., Microsoft eventually expanded to Silicon Valley. The world’s largest software company with approximately 100,000 employees, its profit in 2013 totaled $22 billion on sales of $78 billion. Of the 29 brokers covering Microsoft, five recommend a strong buy, seven a buy and 17 a hold. The price target for Microsoft stock is $47.

• Cisco Systems Inc. (CSCO; $22.52) recently announced plans to invest $1 billion over the next two years to build the world’s largest network to facilitate its cloud computing service.

The company expects to partner with companies including online consultation provider WebEx, Ingram Micro and OnX Management Services. The move aims to help build and support Cisco Cloud Services and expand its data centers. The service will be sold to consumers directly as well as through channel associates.

The network security industry continues to be among technology’s fastest-growing segments, and Cisco continues to lead the field. Cisco commands an 18 percent share of the overall security market.

Wall Street remains weak on Cisco’s prospects, but the downside seems limited. Barclays has downgraded the stock to equal weight, but numerous analysts have suggested a buy. The high target stock price is $30, and the current dividend yield totals 3.50 percent.

Clyde Noel is a Los Altos Hills resident and longtime investor in stocks.

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