2 Winning Tech Picks for Risk Averse Investors

Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Investing in the technology sector has always been perplexing to investors. One of the primary reasons for this is because it's hard to place a value on these companies products. It often takes months, if not years, to see how consumers will respond and see how sales will pan out. Take Microsoft (NASDAQ: MSFT), for example. Since spiking near $60 per share back in December 1999, Microsoft's stock has retreated handily over the past ten years. Its overall market capitalization is less than half of where it was ten years ago. Meanwhile, profits since 2002 have more than doubled in gross terms, and have nearly tripled in per share terms due to stock buybacks. So why has Microsoft, or for that amtter a company like Oracle (NYSE: ORCL), whose revenues and earnings have been climbing steadily over the past five years, gotten so little respect compared to Apple (NASDAQ: AAPL) or Google (NASDAQ: GOOG)

Under GAAP rules, Microsoft reported a loss in its recent fiscal fourth quarter, as it wrote down its $6.3 billion dollar, ill-suited investment in aQauntive. As a result, Microsoft posted a loss of $493 million, or $0.06 per share. Absent the write down, along with the deferral of some income related to the upcoming Windows 8 release, earnings would have been $6.93 billion, or $0.73 per share, on revenues of $18.6 billion. These non GAAP results constituted improvements over 4th quarter fiscal 2011 of 12%, 6%, and 7% respectively.

Now let's look at some other big tech companies with 12 figure capitalizations. Apple stockholders have enjoyed a splendid ride. The company’s stock is up almost thirty fold since the average stock price of the company in 2002. Google's records only goes back to 2004, but at its current price shareholders have enjoyed a 500% total return since late 2004. The difference between Microsoft and its two tech giant peers? Coolness.

CNN recently had an interesting piece on Microsoft, highlighting how this organization might reclaim the "coolness" that Apple and Google have, and that Microsoft used to have in the 1990's. The key to restoring some of that cool factor would be for Microsoft to stop trying to be all things to all people, reinvigorate its rewards to third party application writers, and become more involved in open, cloud based applications. Perhaps most importantly, the company needs to stop doing things that make the public perceive Microsoft as a follower instead of a leader. Microsoft was in a position to introduce an e-reader long before Kindle or Nook. But infighting and bureaucracy killed the incipient technology. How would things be today if Microsoft had gone on to be the first to market an e-reader? We will never know, but I doubt its market value would be barely 30% of Apple's.

It is not just the e-reader, of course. Microsoft's music player was a day late and a feature short of becoming successful in the market. The company’s pre-Facebook Microsoft Messenger lacked the features of its competitors of that era, and was never updated to improve and beat its rivals. Time after time, Microsoft has shown a lack of the vision, flexibility, or both, the company needed to make itself into a consumer friendly enterprise.

There are many reasons I like Microsoft right now. Its new operating system just might give it a boost in the lucrative cell phone market. At the close of the second quarter, the company was sitting on over $60 billion in cash, and can buy nearly any business it might want to pursue. It pays an above average 3.0% yield, and has a reasonable five year PEG of 1.18. Microsoft cannot simply continue to increase revenue and earnings indefinitely and have its stock price lie dormant. At its current price of around $30 per share, I see Microsoft as a long-term buy and hold.

Another similar company I see worthy of long term consideration is Oracle. Its revenue and earnings had been climbing steadily, the latter of which at an average clip of 19% over the last five years. Oracle will wring more savings from its acquisition of Sun Microsystems in 2010. But that acquisition was made for an expensive price ($7.6 billion) at a time when engineered computing was starting to give way to "cloud" applications.

In the first quarter of its fiscal 2013, Oracle disappointed on the revenue front, with a decline of a little over 2% from the same quarter of 2012; this brought revenue down to to $8.18 billion. Software sales were up 4%, but that was overwhelmed by declines in hardware (19%) and services (6%). Despite this, expense cuts allowed profits to increase 11%, to a GAAP $2.03 billion, or $0.53 per share. Adjusted earnings enjoyed a 6% jump from the year ago figure, to $2.63 billion,

The reason for the revenue drop is really more than a cloud issue. Oracle is a global company, as demonstrated by the 52% of revenue the company obtained from outside the United States. Companies in the U.S., Japan, and the European Union sit on a combined $7.5 trillion of cash, much of which is awaiting the result of domestic presidential elections. No matter how the election in November turns out, many of these companies will appreciate knowing more about their political and tax destiny of the next four years, which should shake some of that cash loose, and into Oracle products.

With a PEG of 0.97, I see Oracle with far more upside than downside potential in the intermediate to long-term. With its financial strength and over $30 billion in cash, Oracle joins Microsoft as a suitable holding for conservative investors interested in technology exposure.

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StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, Microsoft, and Oracle. Motley Fool newsletter services recommend Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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