What went wrong amongst tech companies?
The Intel Corporation (NASDAQ:INTC) and Microsoft Corporation (NASDAQ:MSFT) duo, for the most part, under-performed. Intel had to lower its guidance, and its server segment reported flat year-over-year revenue growth. This is weird isn’t it? Almost everyone is talking about big data, and changes in demand. The prevailing argument is that the cloud will grow, and grow at rapid rates. What some do not know about the cloud is that there are some winners and some losers in this story.
The side that seems to be doing most of the losing is hardware and other equipment manufacturers. In the second-quarter earnings reports from Oracle Corporation (NASDAQ:ORCL) and International Business Machines Corp. (NYSE:IBM), both companies reported year-over-year declines in systems and hardware. The good news is that a server tends to have low gross margins anyway, so the effects on profitability for International Business Machines Corp. (NYSE:IBM) and Oracle Corporation (NASDAQ:ORCL) can be largely mitigated through software and service sales, which have high margins.
So there are varying ideas about how the cloud will grow. Some believe in platforms as a service (which allows people to create web applications using software tools in the web). Others believe that the growth will come strictly from software as a service (stuff like Office 365, and salesforce.com, inc. (NYSE:CRM)).
The idea, however, is that growth in cloud revenue is likely to come in the form of subscription fees. Services, rather than infrastructure needs. After all the brilliant geniuses at Intel Corporation (NASDAQ:INTC) have continued to improve the power of computers, which have allowed companies like Facebook Inc (NASDAQ:FB) to spend even less on data centers.
Source: YChartsNotice the correlation in higher profit margins for Facebook, and falling revenue growth in Intel’s server segment? This is because Facebook Inc (NASDAQ:FB) can run fewer servers thus having higher margins; Intel Corporation (NASDAQ:INTC) cannot sell more processors, so it results in falling rates of sales growth.
Conclusion
Going forward Facebook and Apple Inc. (NASDAQ:AAPL) are the way to go. Avoid Intel Corporation (NASDAQ:INTC), because there are serious structural issues that the company is currently facing.
The article Technology Sector Trends That Investors Cannot Ignore originally appeared on Fool.com and is written by Alexander Cho.
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Apple, Facebook, and Intel. The Motley Fool owns shares of Apple Inc. (NASDAQ:AAPL), Facebook Inc (NASDAQ:FB), and Intel Corporation (NASDAQ:INTC). Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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