Stocks finally appear to be on a bull-market run. According to various investment publications, the leading sector in this new bull market has been technology. This may be surprising to some, especially since one traditional stock market belief is that the group that leads an advance is not likely to lead the next market advance.
But there is good reason for this deviation from historical performance — technology is still the basis for improving corporate productivity, future economic growth, and low inflation. Over the past three years, the technology sector took a breather after a phenomenal run in the late 1990s. Now the stock market is telling us that technology is about to resume a leadership position in the new bull market.
Just look around at the year-to-date stock-price moves of many of the most widely held technology leaders of the past.
Cisco Systems: 34.4%
Dell Computer: 18.3%
Sun Microsystems: 74.3%
Nice list, nice gains. But where’s Microsoft, the all-time technology darling?
At one time, near the peak of the stock market, Microsoft was the largest company in the world as measured by market capitalization. After becoming a public company in 1986, it took only 15 years for it to reach the top. The combination of Intel’s Pentium chip and Microsoft’s one-two punch of the Windows 95 operating system for Pentium-based computers and Office work productivity software changed the way in which corporate America — businesses both large and small — increased productivity. The success of Microsoft could be measured in the rising stock price as well as the multi-billion dollar “cache” on the balance sheet. Yet, the year-to-date stock-price performance of Microsoft has been disappointing — an actual decline of 3.8 percent through June 11.
One problem Microsoft has faced for many years has been ongoing legal trials. The company has been accused of monopolistic practices in an industry that it dominates. Anti-trust suits by both the Justice Department and a few state governments have tended to siphon away valuable corporate resources as well as management time. Now, when the company upgrades a product by incorporating new technology into either a modified operating system or business-process software, such as Office, there is a potential threat of anti-trust litigation from a competitor.
Like a troubled tobacco-industry giant, Microsoft finds itself in a legal spotlight when it comes to managing around monopoly power.
Investors are also concerned with the growing threat of competition in Microsoft’s sector. With monopoly power, Microsoft has been able to restrict the use of new operating systems and related software through new anti-pirating technology. As a result, consumers who might have used software on more than one or two machines won’t have that option any longer. On the other hand, new competition from the Java programming language (Sun Microsystems) and the free Linux operating system may put pressure on Microsoft’s ability to maintain market share for it’s meat-and-potatoes product lines.
Finally, technological advances — in both operating systems and office software — don’t justify the expense of making upgrades to new products. My experience is that Windows 98 works just fine for many computer users who need just the basics to access the Internet or perform simple computer functions. Fortunately, software doesn’t wear out so there is no need to replace it unless, or until, there is adequate justification on a productivity basis to spend the money for an upgrade. I can’t see that case being made for recent XP versions of Microsoft’s most profitable products.
One factor that might sustain Microsoft is the fact that virtually all computer manufacturers equip new machines with the latest Microsoft operating system. I would become concerned about Microsoft’s future if these computer makers seriously substituted lower-cost operating systems to make their hardware less expensive in the competitive world of personal computers.
Service is also an important issue. Recently, a friend of mine who has been using Microsoft products since 1991, had to spend three hours on the phone with a Microsoft technician to install the Windows 2000 version of the company’s operating software. I don’t think Microsoft made any profit on that sale.
The stock market tends to be a good indicator of a company’s future growth and profitability. Given Microsoft’s poor stock performance so far this year, investor’s should be concerned about what that stock performance is saying about “Mr. Softie.”
— Tom Nugent is Executive Vice President & Chief Investment Officer of PlanMember Advisors, Inc., and an investment consultant for Wealth Management Services of South Carolina.