Weekly Review: HP, Microsoft, IBM And Adobe

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It was an eventful week for companies in the technology space as many of them contemplated change in strategy to boost revenues and counter the slowdown in global IT spending. The AMEX Information Technology Index (NYSE:XIT), which is compromised of large cap technology stock listed on New York Stock Exchange, declined in conjunction with the broader technology market, NASDAQ 100 Technology Sector(NASDAQ:NDXT). In this report, we discuss some of the key events from the past week for Hewlett-Packard Company (NYSE:HPQ), Microsoft Corporation (NASDAQ:MSFT), International Business Machine (NYSE:IBM) and Adobe (NASDAQ:ADBE).

HP

During the week, Hewlett-Packard was in news due to its proposed split into two companies.  [1]  As part of the split, the company also proposed to cut 5,000 additional jobs, over and above the targeted 50,000. The new cuts amount to about 1.6% of its total workforce, which stands at 317,000 at the end of September. Due to the news, its stock rallied on Monday before falling in line with the market. Our valuation of $29.79 (market cap of $55.7 billion) for the company is 20% below the current market price of $34.51 (market cap of $64 billion). We expect HP to report revenue of around $115 billion and net income of $6.1 billion for calendar year 2014. We forecast non-GAAP diluted EPS of $3.2, which is below the market consensus of $3.6 (Reuters).

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Microsoft Corporation

Microsoft intensified its efforts to gain a foothold in the rapidly transforming mobile devices industry with two partnerships. While last week HP launched cheap variants of tablets and laptops that will run Windows, this week Microsoft forged a partnership with Adobe to bring Adobe’s software to Microsoft’s touch platforms.  The companies are working together on hardware/software combinations. We have a $44.28 price estimate for Microsft, which translates to a market cap of around $366 billion. Our price estimate represents a slight discount to the current market price. We estimate the company’s calender Year 2014 EPS at around $2.72 (Company has financial year ending in June), compared to a consensus estimate of around $2.69 according to Reuters.

IBM

IBM’s stock declined during the week, inline with the broader market. However, during the week, IBM unveiled the first servers based on the new Power8 CPU architecture to take on Intel’s x86 based servers. [2] In other news, IBM has resumed talks with Global Foundries to sell its chip manufacturing unit, according to Bloomberg. [3]  Our valuation of $227 (market cap of $237 billion) for the company is 25% above the current market price of $186 (market cap of $186 billion). We expect IBM to report revenue of around $101 billion and net income of $16.87 billion for 2014. We forecast non-GAAP diluted EPS of $16.75, which is below the market consensus of $18.41 (Reuters).

Adobe

Adobe’s stock continues to defy the broader markets as it declined at a slower pace compared to the indices. For the week ended 10th October, the stock traded in the $66-$68 range. During the week, the company rolled new apps for mobile at its Max conference. Adobe’s new apps  for the Photoshop and Lightroom family, Illustrator software (Mobile), and Creative Cloud are intended to “capture” images, colors and design elements from the real world. Currently, our valuation of $58.14 (market cap of $28.9 billion) for the company is 15% below the current market price of $67.14 (market cap of $33.4 billion). We expect Adobe to report revenue of around $4.28 billion and net income of $283 million for calendar year 2014. We forecast non-GAAP diluted EPS of $1.25, which is inline with the market consensus of $1.26 (Reuters).

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Notes:
  1. Read about it here []
  2. IBM Pushes Open Power8 with Scale-Out Servers, www.toptechnews.com []
  3. IBM Said to Resume Talks to Offload Chip Unit, October 8 2014, www.bloomberg.com []