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Move over Microsoft, Apple Takes the Pole (Analysis of top 15 IT industry leaders' market & business performances)

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INDUSTRY TRENDS

Updated 10/11/10, 6:00PM HST

Analysis of Top Global IT Companies' Market & Business Performances

Move over Microsoft, Apple Takes the Pole

Microsoft No Longer Market Cap King; Apple, IBM, Oracle, Intel, Accenture Gain; HP, Dell, Cisco Drop in Rankings

Top IT Companies' Market Cap Drops 1% Even As Their Earnings Surge 39%, Revenues Rise 10%, Equity Up 16%

HAIKU, Maui, Oct 11 –  Move over Microsoft, Apple takes the pole. The IT industry has a new market cap king and the crown that goes with it.   Since the start of the year, Apple's share prices have risen over 40%, while Microsoft's dropped 21%.  IBM, Oracle, Intel and Accenture also gained, while HP, Cisco and Dell dropped a notch in the rankings.

A year ago, we noted that a "Rally of Hope over Fact" was under way in the stock market.   Earnings were down but the company valuations rose anyway.  This trend continued through to the end of 2009 (see Rally of Hope over Fact Continues). 

Nine months later, the situation is reversed.  Net profits of the top 15 IT companies we follow have surged 39%, but their market caps dropped 1% since the start of the year.  Which suggests that the investors are not hopeful that their strong business performances can be sustained in the future.

MARKET Rankings of Top IT Companies

Apple, EMC, Oracle and Accenture, in that order, have been the strongest stock market performers so far this year.  SAP and IBM also rose in the single digits.  As for the rest of the top IT industry leaders, their stock market valuations have all declined at varying rates.  Which means that nine out of the top 15 IT companies are stock market laggards.

It is not very often that you find companies like HP, Microsoft, Yahoo or Google in the cellar of any industry rankings.  Yet that's exactly where they placed so far this year in terms of the market cap change.  Google seems to be staging a private little rally of its own in the last month or so, and is moving up the ladder.  The other three laggards, however, seem to be firmly anchored at the bottom of the leaders' pile.

The price/earnings (P/E) ratio rankings also show that the investors regard Microsoft, HP, Intel and IBM as the "old guard."  The four industry giants are holding up the rear relative to other competitors.   Considering that the "Four Musketeers" still make oodles of billions of dollars in net profits, that hardly seems justified or fair.  But "all's fair in love and war," as they say.  And stock market trades on emotions just as if it were love and war.

IBM Stock Still Undervalued? 

A year ago, we also noted that IBM stock, for example, was undervalued relative to its peers.  Big Blue shares were trading at under $120 at the time.  We said they should be worth at least $137 (see "Rally of Hope over Fact", Oct 2009).  Well, IBM closed at $139.66 today.  Yet it still looks undervalue relative to the IT industry market cap leaders.  Apple, Google and Oracle are trading at P/E ratios of 22-23.  IBM's is 13 (see the table below). 

So there is still upside room for the Big Blue shares to rise.   But do not necessarily expect that to happen at a time when the IT leaders' rally seems to be running out of steam.  A decline in the Market Cap/Equity ratio, or the "Fluff Ratio," as we dubbed it in 1998 (see "Dell: King of Fluff ", Nov 1998), is another indication which points in that direction.

At the end of 2009, the Fluff Ratio for the top 15 IT industry leaders stood at 4.6.  Now, it is down to 4.0.  Partly, that's because the higher earnings that Wall Street was predicted have resulted in increased equities, which are up 16% since the start of the year.  But also, by scaling down their expectations about the future, the investors are removing excess "fluff" from the market.

Meanwhile, the industry's oldest company - IBM - is only eighth in terms of equity.  Even a relative upstart - Google - has now surpassed it.  And not just surpassed it.  More like left it in the dust.  In fact, all top six IT leaders have equities in excess of $40 billion vs. only $21 billion for Big Blue.  Such as is the price of aggressive stock buybacks that IBM has engaged in for the last 15 years. 

Basically, Big Blue is giving its wealth away almost as fast as it is making money.  So forget the old-fashioned way of squirreling money away, or reinvesting it more aggressively in one's own business. 

BUSINESS Rankings of Annex Top IT Companies

The pecking order at the top of the IT industry's revenue picture is still pretty much the same, except that Apple is now nipping at the heels of Dell and is likely to surpass it by the end of the year (also see "Apple, Google Lead Comeback", July 2009).  HP and IBM were the first IT companies to surpass the century revenue mark, and then drop back a little (right chart).

Microsoft, Dell and Apple are now neck-and-neck in No. 3-5  positions in the industry, well back of HP and IBM.  Fujitsu is  No. 6.  And so on...

As for net earnings, IBM and Apple are closing the gap on Microsoft (left chart).  Intel, HP, Cisco, Google and Oracle are all bunched up in the $6 billion to $10 billion range.  Fujitsu. the sixth largest company in terms of revenues is dead last when it comes to profitability.

Apple, Oracle and Intel are the fastest growing companies among the top 15, surging by 75%, 35% and 34%v respectively.   Google, Cisco, EMC, Microsoft and HP also reported double-digit revenue growth.

Apple's net earnings are also the fastest growing in the industry, up 153%, although that may not be apparent from the chart on the left.  That's because Yahoo and Intel are ostensibly No. 1 and No. 2 in this respect, but only because their 2009 profits were so dismal.  Apple, on the other hand, had a good year in 2009, and a great one so far this year.

Happy bargain hunting!

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