Credit: Shutterstock photoAnother year has gone by. And again, it's time for investors to reassess their portfolios to maximize profits, cut losses, sell the non-performers and include the stocks that will make 2016 profitable for them.
Talking about profitable stocks, it is hard to imagine any investment portfolio that is devoid of technology stocks. Tech stocks have somehow always been the cynosure of Wall Street.
In 2015, the tech sector had a relatively good run against a tough macroeconomic backdrop. Advancements in artificial intelligence (AI) technology, breakthroughs in chip shrinking technology, self-driving cars, personal assistants, high-speed Internet and home automation kept the buzz surrounding the sector alive.
Among sector bellwethers Apple IncAAPL has been one of the most sought after stocks along with Amazon.com, Inc. AMZN , Alphabet Inc. GOOGL and Facebook, Inc. FB . Though Microsoft Corp.MSFT is a biggie, it generates relatively less interest among investors.
However, 2015 was a sort of reversal for Apple and Microsoft. The year turned out to be a sore one for Apple whereas for Microsoft, it was a huge year.
Despite posting record profits and revenues for the year, Apple finished in the red. While for Microsoft, the current management's no nonsense attitude clicked well with investors, translating into solid yearly gain.
Here's a look at the performance of both the companies in 2015 and what awaits them in 2016.
Apple
Apple investors didn't see this coming. After reporting over 40.0% gain at the end of 2014, 2015 saw the stock slide 7.7%. In contrast, major indices, which had a turbulent run throughout 2015, managed to put up a relatively better show. The S&P 500 was down 2.1% while the Nasdaq composite was up 4.2%.
This was despite Apple beating the Zacks Consensus Estimate in the trailing four quarters by an average of 7.8%. Moreover, in fiscal 2015, the company's top line grew 28%.
Concerns surrounding its primary cash cow, iPhone's decelerating sales had a telling effect on the stock. Apple derives more than half of its revenues from iPhone with the U.S and China being its primary markets.
However, an analyst points out that iPhone sales in the U.S are likely to suffer as most of the domestic wireless carriers move to the Equipment Instalment Plan (EIP). Recently, AT&T T announced its EIP for all the phones sold by it including the smartphones. These efforts by carriers might thwart Apple's idea to boost iPhone sales through its upgrade plan.
Apple had unveiled a smart upgrade plan for users, alongside the latest iPhone 6s and iPhone 6s Plus to enable Apple users to get devices for a monthly payment of about $32 and $37, respectively for a two year interest-free period. Users who avail this program will be entitled to upgrade their devices every year.
Even the high potential Chinese market is fraught with challenges. Though Apple believes that China is set to become a major contributor to its total revenue, driven by the growing number of middle-class customers, slowdown in Chinese equity markets have made Apple investors wary of the country's growth prospects and its possible impact on iPhone sales. Today, the Shanghai Composite and Shenzhen Composite lost 6.9% and 8.0%, respectively, causing the government to prematurely halt trading for the day.
Add to it the already shrinking iPad sales, muted response to iPad Pro and chances of tax rates escalating in Europe and investors can't be blamed for being jittery. While Apple Pay, too, has failed to make a splash, we believe stiff competition in the mobile payments arena is only going to make things tougher for Apple.
However, there are a few positive aspects that also need attention. With the Watch, despite mixed reviews, Apple has become the number two player in the fast growing wearable market. Per a recent IDC report, Apple will be dominating the wearables market in 2015 with over 61% market share. Overall, the wearable market is expected to see units sold grow to 111 million in 2016 from estimated 80 million in 2015 and by 2019, it will be around 214 million units.
Eventually analysts believe that Apple will be focusing more on unbundling its services like, iTunes, iBooks, Apple Music and Apple TV to boost its user base. This is because these are similar to the services offered by rivals and thus will prove unprofitable if offered only on iOS.
Then there is Apple's extensive share repurchase and dividend plan that emanates from its over $200 billion strong cash pile. Apple paid over $50 billion in fiscal 2015 towards capital returns while achieving $143 billion of its earlier announced $200 billion capital return program. Apple has also stepped up its self-driving car initiative and expects cars to hit the roads by 2019. Asian expansion strategies also continue in full steam. Lastly, the company's loyal customer base is something we should not underestimate.
Microsoft
With a gain of 15.9%, this has indeed been a huge year for Redmond, WA based Microsoft Corporation. The company has outperformed in the four trailing quarters by an average of 14.5%.
After being relegated to the backbench, this tech behemoth has posted a turnaround under CEO Satya Nadella. The no-nonsense attitude of Nadella in writing down Nokia, developing Surface, pushing strongly into the future with Windows 10 (eventually to be provided as a service), bundling services with Office 365 to take legacy workloads to its cloud and simultaneously increase cloud revenue have all worked in its favor.
Microsoft's cloud infrastructure business is second only to Amazon's and that position is likely to hold steady in the foreseeable future. Among notable cloud deals inked in the year include one with Adobe. The latter announced the integration of its Marketing Cloud with Microsoft's Dynamics CRM business to enable their clients improved interaction with customers through more efficient management of their marketing, sales and service operations.
Microsoft and Salesforce also announced a CRM collaboration at the Dreamforce conference that will make customers' CRM activities in the cloud more seamless and generate additional business for the two. Microsoft also succeeded in cornering Dell and HP to put their sales forces, services and support behind its Surface devices.
Microsoft also made advancements in virtual reality with its HoloLens headgear and partnerships with NASA and Facebook's Oculus. Reportedly, Microsoft also acquired over 20 companies in 2015. Microsoft will be investing $100 million in ride hailing app maker Uber, to which it sold its Bing mapping unit earlier this year. Uber is seeing phenomenal success in several Asian markets, so the company hasn't had any trouble raising funds.
Solid managerial execution has reflected on its net cash and short term investments balance which stood at $60.8 billion as of Sep 30, 2015. The significant amount of cash provides the flexibility required to pursue any growth strategy, whether by way of acquisitions or otherwise. The company has a strong shareholder return plan in place and is expected to hike dividend this year.
However, softness in the core computing market is a concern. The company is dependent on this market for the largest chunk of its revenues. Although enterprise refresh rates have not been too bad, Microsoft continues be impacted by the weakness in notebooks and netbooks as consumers move to tablets. Additionally, cannibalization of the core desktop market by mobile computing devices is a secular negative for the company and the future growth of Windows is greatly dependent on its ability to build position in mobile devices, particularly tablets.
The phone business remains a pain. Though Microsoft is improvising on its mobile business, the segment is yet to generate significant returns.
Bottom Line
Apple and Microsoft two of the biggest companies in the tech space. Both the stocks have their share of positives and negatives. While Apple has been a steady performer, Microsoft is recovering nicely too. Both have strong balance sheet, ample financial flexibility, manageable debt capital ratios and strong shareholder return policies in place along with sound management.
Taking into account all of these factors, it would be difficult to say as to which would be a better pick. At present, both the stocks carry a Zacks Rank #3 (Hold).
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
