Tech Bookends: Software & Hardware

05/15/2013 7:45 am EST

Focus: STOCKS

Genia Turanova

Editor, Leeb Income Performance

There's a matching set in these two technology legends, each of which is instantly recognizable within their important niches, writes Genia Turanova of Leeb's Market Forecast.

Microsoft (MSFT), the world's largest software maker, divides its gigantic business (nearly $74 billion in fiscal 2012), into five segments.

The largest unit, its business division, generated nearly $11.2 billion in the first half (ended December 2012), 90% of it from the Microsoft Office suite. Its second-largest, the server & tools segment, produced over $9.7 billion in the first half, with roughly 80% from volume licensing sales, license sales to OEMs, and retail packages, and the rest from Enterprise Services.

Windows division, which develops and markets PC operating systems, related software, and online services and PC hardware products has generated about $9.1 billion in revenues. About 65% of it came from selling Windows to OEMs.

Its entertainment & devices (which makes XBox, the bestselling gaming console in the US) and online services divisions, respectively, threw off first half revenues of more than $5.7 billion and more than $1.5 billion.

The stock price lagged, due to Microsoft's focus on PCs, broadly seen as a potentially shrinking platform. But despite the rumors, the PC is not dead, and Microsoft is dominant there. Plus, steps undertaken in recent years ensure that Microsoft continues to grow.

Its Office suite, for example, which is the largest segment with $24 billion in sales, is growing strongly and remains dominant (its competitors, Google Docs and OpenOffice, only account for about 7% of the overall market).

Overall, the company's earnings are projected to grow more than 9% annually for the next five years.

In hardware, we continue to like data storage leader Seagate Technology (STX), yielding a handsome 4.3% and sporting a ton of free cash flow.

This original equipment manufacturer designs, makes, and markets the hard drives (HDD) sold for servers, desktops, laptops, and smaller consumer electronic devices-to all market spectrums, from computer makers and distributors to both cyber and brick-and mortar retailers.

Seagate temporarily suspended its dividend from 2009 to 2011, but for the foreseeable future stands on firm footing. Both Seagate and its rival Western Digital (WDC) sell all the hard drives they can make, a fact reflected in their improved product pricing.

Last quarter, the prices for Seagate's HDDs declined about 6%; so far, the decline this quarter is much smaller, only 1%. This bodes well for Seagate's margins and EPS. Thus, the shares of Seagate still look attractive.

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