It’s earnings season and everyone is glued to their screens. Investors’ fingers are extremely itchy at this time of the year, only waiting for the next opportunity to buy or dump shares at a moment’s notice. On July 18, the story du jour was Microsoft Corporation (NASDAQ:MSFT)‘s Q4 earnings announcement.
Mr. Softy reported net income of $0.66 per share on revenue of $19.9 billion, whereas analysts were looking for $0.75 per share in net income and $20.73 billion in revenue. Microsoft Corporation (NASDAQ:MSFT) continued to suffer from a declining PC market as consumers are switching from PCs to tablets at a rapid rate. In addition, Microsoft’s attempt to gain share in the tablet market ended up as a flop.
Microsoft Corporation (NASDAQ:MSFT) ended up writing off its inventory of Surface RT tablets as it wasn’t that profitable an idea for the company. The write-off was as large as $900 million. Investors panicked and quickly pushed the “Sell” button, triggering a plunge of 11% in shares. On a single day, $35 billion evaporated from Microsoft’s market cap.
But not all is gloom and doom. For the full-year, Microsoft Corporation (NASDAQ:MSFT) generated $77.85 billion, up from $73.72 billion that was generated in 2012. Microsoft’s operating expenses fell from $34.43 billion to $30.83 billion, which increased the operating profit from $21.76 billion to $26.76 billion.
As a result, net income rose from $16.98 billion to $21.86 billion, translating into $2.61 per share, up from $2.02 per share in 2012. This is impressive because the company’s good results came at a time when the PC industry is suffering sharp declines
A tale of two giants
Microsoft Corporation (NASDAQ:MSFT) officially joined the caravan of technology companies that missed expectations. Earlier last week, Intel Corporation (NASDAQ:INTC) reported an earnings miss and got punished by Mr. Market. Similarly to Microsoft, Intel attributed the main cause of its losses to the declining PC market.
After all, fewer PCs require fewer chips. I believe there are a few solid reasons why investors in these two giants can sleep tight despite these earning misses, and should even take advantage of this dip to buy more shares.
Reason number one: Leaders, at all times
Both Intel Corporation (NASDAQ:INTC) and Microsoft are the indisputable leaders of their industries. Microsoft, for example, controls 92% of the Operating Systems market, while Intel controls roughly 80% of the market for microprocessors. And this dominant edge isn’t disappearing. In fact, it should get wider due to capital investments expected in the future, as measured by expenses on research and development (R&D).
Intel Corporation (NASDAQ:INTC)’s spending on R&D rose from $5.7 billion in 2008 to $10.2 billion last year. This figure is likely to rise to somewhere in the $12 billion area this year. Microsoft, as well, is widening its economic moat by investing in R&D. Mr. Softy invested $8.7 billion in R&D back in 2010, compared to $9.8 billion for 2012. It’s also worth noting that this $1.1 billion rise in R&D has lead to an incremental $11.5 billion in sales.
This intensive investment in R&D simply destroys other competitors. Microsoft Corporation (NASDAQ:MSFT) is a virtual monopoly in the OS market, while Intel’s rival Advanced Micro Devices, Inc. (NYSE:AMD) has turned into a mediocre, unprofitable business. It lost over $1.1 billion in 2012 alone. But, the more worrisome fact is its sales trend.