Big Tech has undoubtedly been the driver of 2020's astonishing rally from its March lows, but their remains some legacy tech giants that have seemingly fallen behind the innovative-curve. At the turn of the century, Cisco (CSCO), Intel (INTC), Microsoft (MSFT), and IBM (IBM) were the hottest tech stocks on the scene. All but the successfully adapted MSFT are looking at their peak performance in the rearview mirror.
The unprecedented pandemic has not been kind to many legacy names.
As investors, we need to decide whether these 3 legacy stocks will fade into the abyss or rise from the ashes of their impending obsolescence with vigor. Are these investable assets?
Cisco epitomizes the dot-com blowout. This company went public with a value of $224 million in 1990, and a decade later, at the height of the dot-com bubble, it became the largest tech company in the world with a market cap of more than $500 billion.
Cisco was integral in connecting the economy to the worldwide web, with the pioneering networking hardware. With this enterprise's innovative engineering, the globally connected society in which we live may not exist.
As expected with any thriving space, Cisco began to see some intense competition from young Silicon Valley start-ups that made small improvements to Cisco's revolutionary technology. The saturating competition, combined with the equity bubble that was getting ready to burst, led to CSCO's massive share price decline from its all-time high of $82 (more than $500 billion valuation) in March of 2000 to trading as low as $8 per share (valuation of below $75 billion) in October of 2002.
Today, CSCO trades at $39 per share, less than half of its 2000 all-time high, but this advanced network enterprise is far from obsolete. Cisco is still a network hardware powerhouse. With the rise of 5G, cloud computing, and the internet of things (IoT) devices, the world is preparing to connect everyone and everything.
Cisco's network hardware positioning and its growing harmonizing subscription-based software are giving this enterprise clearer long-term revenue visibility. Cisco's financials have been hampered by the global pandemic with business spending suspended, but this will pick back up with the rapidly recovering economy around the world. I believe that CSCO is an underappreciated stock that represents a rare value play in a world of stretch tech valuations.
10 out of 16 analysts are calling CSCO a buy today. The stock remains below the most conservative price targets, and its average target represents a 24% upside from where its current price. This legacy stock also yields a cushy 3.75% dividend for those yield-hungry investors out there.
CSCO shares are trending down since its latest quarterly report on August 12th failed to meet analysts' expectations. You may want to wait for this trend to reverse before jumping in.
Intel has disappointed me in recent years, with supply chain issues and production delays that have pushed the chip king out of step with the innovative curve. The previously viewed “value” CPU player, AMD (AMD) , is now taking market share in space that Intel has been building for decades.
This chip pioneer saw its highest valuation near the end of the dot-com bubble. Its shares hit north of $75 a share ($538 billion market cap) and capitulating 83% of its value in the 2 years that followed, analogous to the rise and fall of CSCO.
Intel has been falling behind Moore's Law, which states that transistors' density in integrated circuits doubles roughly every 2 years. This has come to mean that digital chips become twice as efficient and halve in cost every 24 months in laymen's terms.
Co-founder of Intel, Gordan Moore, formulated this theory over a half-century ago, but his legacy enterprise has fallen behind the curve.
Intel announced in earnings in late July that it would be pushing it 7nm chip release out to 2022 or 2023. By this time, the semiconductor manufacturing giant, TSMC (TSM) , will have already begun its production of 3nm transistors. Intel is losing its innovative edge, and its controlling CPU market share is soon to follow.
Intel announced that it would require outside fabricators in a contingency plan to keep up with digital demand, and TSMC is the obvious choice for external manufacturing because of its scale and expertise.
INTC has fallen 13% since the disappointing earnings news on July 23rd, while AMD has surged more than 44%, and TSM has appreciated 28% over the same time horizon. AMD investors are enthusiastic about the opportunity Intel has given them with the consistent fumbles. TSM share has appreciated in anticipation of another massive client joining its ranks.
Intel still has long-standing relationships with key corporations, but these relationships may not last if the company doesn't get its s#%t together.
IBM hit its all-time high in 2013 (unlike the prior two stocks I discussed, which peaked two decades ago), and its shares have actually stayed more buoyant than CSCO and INTC in 2020 thus far. Still, this stock has not been able to match the broader market's performance.
This once personal computing giant is attempting to transition itself for the impending 4th industrial revolution as it pivots away from maturing hardware segments and towards high-growth software. The company is now focused on growing out its cloud-computing offering and big data analytics, utilizing its artificial intelligence (AI) platform IBM Watson.
IBM's Cloud & Cognitive Software division continues to drive growth with its cloud alone growing by 34% this past quarter, driving $23 billion in revenue over the past 12-months. Last summer's enormous $34 billion Red Hat acquisition illustrates IBM's dedication to creating a superior cloud platform.
Despite IBM's moves towards sustainable high-growth software, its legacy divisions still weigh on its financials. The enterprise's top and bottom lines have been declining for years, and so has its share price.
IBM may be a sleeper. As the company sheds its legacy divisions and focuses on the future, this declining enterprise could flip into growth. Management may have been a little late to react to the evolving tech environment, but there is still enormous opportunity in the cloud-computing, big data, and AI.
According to analysts, IBM will start seeing top and bottom-line growth in 2021 and the years beyond. This stock may not be a bad value investment for the Roaring 20s. With a reliable dividend yield of 5.35%, this stock will still produce robust returns for investors, even if it were to trade sideways for the next decade.
These three stocks represent rare value plays in tech. CSCO, INTC, and IBM have unperformed in 2020's pandemic ridden equity markets and have not participated in the tech fuel rally that has driven many of their cohorts to continuously new highs.
I believe that each of these legacy technology enterprises has an opportunity to kick it into gear and flip its declining businesses back to growth.