August 19, 2022

Reuters Breakingviews: Cheap Big Tech Stocks May Stay That Way

Microsoft, Apple and Google — worth more than $650 billion combined — seem to have plenty of growth left in the tank, but it is not evident in their stock valuations. The shares of all three tech giants, after accounting for their cash hoards, trade at a discount to the market. This phenomenon is not new. Investors shunned the sector for long stretches twice over the last 40 years, worrying that obsolescence might pre-empt expansion.

Intel, for one, can vouch for the experience. In the mid-1970s, shares of the rapidly growing chip maker could have been bought for just six times earnings. Few tech investors seized the opportunity, however, because of a recent scarring.

A few years earlier, upstart mainframe companies like Control Data had been all the rage. And I.B.M. and Xerox once boasted spots in the list of “nifty fifty” large caps, whose growth was supposed to continue steadily unabated. Those bubbles popped when computer orders slowed and economic hard times hit blue-chip corporations.

By the early 1980s, investors had regained their zeal for growth stocks. Hewlett-Packard, with its hot-selling desktops, was bid up to 28 times expected earnings. Intel regained favor, too, and was valued at a heady 60 times. Meanwhile, the Standard Poor’s 500-stock index was trading at a mere multiple of 12.

Recession brought a fresh malaise at the end of that decade. Valuations on many smaller tech companies sank below even the cash on their books, according to Fred Hickey’s High Tech Strategist newsletter. More significant, growth companies suffered along with industry gorillas. Compaq, a leader in the sizzling PC market, was expanding its bottom line by more than 60 percent a year but traded at just nine times earnings, or about half the multiple of the broader market. It took another five years for tech stocks to rebound.

So, while Microsoft, Apple and Google look cheap today, history suggests the discount could linger. Microsoft is at 7.5 times its cash-adjusted earnings expectations for 2011, Apple trades at 9.8 times and Google at 11.5 times — compared with 13 for the market. A willingness by investors to bid up unprofitable companies like LinkedIn and Pandora means they are not yet repulsed by the entire sector. As in earlier cycles, big tech stocks may need to wait until the day comes that they meaningfully climb again.

Hulu Held Back

Hulu, the online TV service, should be set free. The media titans NBC Universal, the Walt Disney Company and the News Corporation have given Hulu a good running start. But their ownership in the company creates conflicts that will retard its growth. An analogy can be found in banking, where Visa and MasterCard have flourished since being granted independence. An unsolicited approach for Hulu creates a perfect opportunity to find it a better home.

Hulu has defied skeptics who doubted that old-school media companies could collaborate to create a successful service for a new generation of TV watchers. Hulu said last year it was profitable, and it expects to generate $500 million in revenue this year, mostly from advertising but also from its one million paying subscribers.

But joint ventures have a knack for degenerating. Hulu already has shown signs of strain. Its two executive champions at the News Corporation and NBC are gone. Hulu’s chief executive, Jason Kilar, even went so far as to criticize the ways of his corporate overlords in a blog post in February.

When Comcast, America’s biggest cable operator, bought NBC Universal, trustbusters stripped it of any say on how Hulu is run. Comcast is also aggressively pushing its own popular on-demand services and making it easier for subscribers to watch programs on mobile devices. What’s more, as networks seek higher fees from cable and satellite companies, Hulu’s presence is increasingly a sticky point in negotiations.

Letting Hulu fly now could enable it to scale new heights. That was certainly the case for the two major credit card networks once they were cut loose by their financial institution masters. Since its initial public offering five years ago, shares of MasterCard have soared by 500 percent. And Visa’s annual operating income has nearly quadrupled since it went public in 2008.

Under new ownership, Hulu will still be in thrall to the major media companies. Like Netflix and other sites, it must first pay for the programming. In the right hands, though, Hulu stands a better chance of becoming a fixture of the inevitable online video oligopoly. ROBERT CYRAN


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