If we assumed that Apple’s free cash flow would grow at only 15% in the next five years, and then grow to infinity at only 1% per year with a discount rate of 10%, Apple would be worth as much as $765.5 billion, or more than $815 per share. If we do an inverse DCF, this price would mean that Apple would grow at paltry 5% per year in the next 5 years, then the free cash flow stays flat to infinity. Moreover, the discount rate is higher at 12%.
Following Warren Buffett in this one
The second company is the technology giant International Business Machines Corp. (NYSE:IBM). Interestingly, International Business Machines Corp. (NYSE:IBM) is Warren Buffett’s biggest bet on technology. He owned more than 68 million shares in the company, with a total value of more than $13 billion at the end of 2012.
International Business Machines Corp. (NYSE:IBM) is Buffett’s third largest position, accounting for 17.3% of his portfolio. Technology investors might understand well the high level of stickiness in enterprise customers for IT and networking systems. Thus, as big corporations have been using International Business Machines Corp. (NYSE:IBM)’s products, there will be high resistance to change.
International Business Machines Corp. (NYSE:IBM) has five business segments, with the biggest revenue contributor being the Global Technology Services segment, with more than $41.4 billion in revenue, while the Software segment ranked second with $28.7 billion. At $211 per share, International Business Machines Corp. (NYSE:IBM) is worth around $235 billion on the market. The market values IBM at 9.5 times EV/EBITDA. IBM is paying investors dividends with a yield of 1.6%.
Decent yield with a huge cash balance
Microsoft Corporation (NASDAQ:MSFT) is the company at which investors should take a closer look. Its share price has fluctuated in a quite narrow range for a decade. What I like about Microsoft Corporation (NASDAQ:MSFT) is its decent dividend yield, a strong balance sheet, and cash generating ability with a cheap valuation.
Indeed, Microsoft has a quite strong and liquid balance sheet. As of December 2012, it had $72.6 billion in total stockholders’ equity, nearly $79 billion in cash, and nearly $14.2 billion in both long and short-term debt. Thus, its net cash stayed at around $64.8 billion, or $7.70 per share. With those huge cash balances, Microsoft could issue $155 billion, or $18.35 per share, in preferred stocks, paying 5% dividend yield.
As its adjusted EPS was $1.93, the value to common equity would be around $13.50 per share (7 times earnings). Consequently, Microsoft should be worth more than $39.50 per share. At $29 per share, Microsoft is worth around $243.3 billion on the market. The market values Microsoft at only 6.5 times EV/EBITDA. Investors could get a dividend yield of 3.2% when they invest in Microsoft at its current price.
My Foolish take
I like Apple the most as it is becoming a value and a growth stock at the same time. IBM, with its global leading position and strong operating performance, could also be considered a top pick for the long run. Microsoft is the most vulnerable to the struggling PC industry. However, the Microsoft Business segment has been rapidly increasing in both top line and bottom line. With its decent dividend yield and strong cash balance, it could also be one of the safe pick for investors.
The article The Safe Bets Among Large Cap Tech Stocks originally appeared on Fool.com and is written by Anh HOANG.
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