After reporting stellar quarterly financials, Apple (AAPL) and Microsoft (MSFT) remain attractive and for good reason.
In the fiscal third quarter, innovation king Apple, boasted revenues of $15.7 billion, up more than 61% from a year ago, yielding profits of $3.51 per share. These results smoked Wall Street’s revenue expectations by nearly $1 billion and painted a rosy picture for the second-largest U.S. listed stock by market cap.
One reason Apple is likely to continue to shine is that demand for the iPhone 4 remains insatiable despite reports of reception problems. Additionally, the Cupertino, California-based technology firm recently updated its all-in-one iMac desktop computer line with new chips from Intel (INTC) and better graphics, which is expected to further boost appeal of iMacs. In the most recent quarter, Apple sold 1 million desktop Mac units, an increase of 18% from the prior year, generating nearly $1.3 billion in revenue. Currently, it is estimated that Apple is the fourth largest computer vendor in the U.S. with nearly 8.8% of the market share, giving the company the opportunity to grab more market share.
A third reason Apple is expected to continue to shine is its decision to take an aggressive approach to pricing its iPhone 4 and smash hit iPad. The company expects its new pricing approach to reduce margins of these products, but will likely make up for this in increased volume. Additionally, Apple remains relatively cheap and is sitting on an enormous pile of cash. At current forecasts, the stock is trading close to 15 times forward earnings and is hoarding $45.8 billion in cash and long-term investments.
Lastly, in the third quarter press release, Steve Jobs reassured the public that Apple has “amazing products still to come this year.” This only means that upgrades to current products or strategic alliances with other companies will further boost consumer demand for the company’s products.
Microsoft seems to be singing a similar song. In its most recent quarterly earnings reports, the technology giant boasted revenues of $16.04 billion, a 22% year-over-year gain and nearly $750 million higher than Wall Street’s expectations. To add icing to the cake, every one of the Redmond Washington-based company’s businesses witnessed double-digit revenue growth. The Windows division grew a whopping 43.5%, primarily driven by the huge success of Windows 7. Additionally, Microsoft’s search engine, Bing, continues to gobble up market share as it witnessed a 19% increase in online advertising revenue in the last quarter.
As for the future, there is still plenty of room for revenue growth for Microsoft. Currently, Windows 7 is running on a mere 15% of the world’s installed personal computers, this number is expected to increase to nearly 90% of the world’s installed personal computers by the end of 2011. Additionally, the release of the first smartphone utilizing the new Windows Phone 7 Operating System and the debut of the new hands free interface for the Xbox 360 game console is expected for later this year. Both of these are expected to be hits with consumers around the world.
Lastly, similar to Apple, Microsoft’s fundamentals remain relatively strong. The company is sitting on $38.4 billion of net cash and investments and is trading at nearly 11 times forward earnings making it cheap.
To gain exposure to both of these technology giants one could consider the following:
- iShares Dow Jones US Technology (IYW), which allocates 12.22% of its assets to Apple and 10.44% to Microsoft. IYW closed at $56.75 on Tuesday.
- PowerShares QQQ (QQQQ), which allocates 19.97% of its assets to Apple and 4.34% to Microsoft. QQQQ closed at $46.42 on Tuesday.
- Technology Select Sector SPDR (XLK), which allocates 10.71 % of its assets to Apple and 8.91% to Microsoft. XLK closed at $22.39 on Tuesday.
Although an opportunity exists in the technology sector, it is equally important to keep in mind the inherent risks involved with investing in the sector. To help protect against these risks, the use of an exit strategy which identifies specific price points at which downward price pressure is likely to be eminent is important.
According to the latest data at www.SmartStops.net, these price points are as follows: IYW at $55.33; QQQQ at $45.25; XLK at $21.84. These price points change on a daily basis and are reflective of market volatility.
Disclosure: Long IYW