The Right Read on the Big Tech Plays

Secular vs. cyclical. Same old debate. That's what I think about the Amazon (AMZN - commentary - Trade Now) and Microsoft (MSFT - commentary - Trade Now) situations, as well as Google's (GOOG - commentary - Trade Now) business.

All three saw cyclicality in their businesses as fitting the consumer's weakness and decision not to spend, the enterprise spending sluggishness, and the cutback in ad spend, respectively.

I think that Amazon's weakness in its core business of books and DVDs is secular and in some ways deliberate, and in other ways technological overrun and competitive concerns. Book sales are just awful in this country, and the decision to go Kindle ruins profit margins. Apple (AAPL - commentary - Trade Now) made this decision with the iPod, but in that case it was Warner Music's profit margins, to use the classic example. Amazon is cannibalizing its own business. DVDs? Lowered prices, competition from Costco (COST - commentary - Trade Now), Netflix (NFLX - commentary - Trade Now) and Wal-Mart (WMT - commentary - Trade Now) all weigh on this one. Plus, as NBC Universal and Disney (DIS - commentary - Trade Now) found, there is a secular decline in library building that has taken everyone by surprise.

Microsoft is a product-cycle-driven company, and this is the quarter that there's a gap. That's happenstance. There is a secular decline in Windows use, but I still don't think it's an issue. Cyclical enterprise concerns are serious but curable with a better second half for IT spend.

Google's tough because it really is doing well in terms of secular growth -- business is still going their way off of print -- but there was cyclicality to ad spend, and we don't want to see cyclicality when it comes to Google. Nevertheless, this one's selling at less than 1 times growth rate. It's a damaged stock more than it is a damaged company, and I expect that it can roar back when the economy turns. But so will Caterpillar (CAT - commentary - Trade Now) and United Tech (UTX - commentary - Trade Now) and Freeport (FCX - commentary - Trade Now), so do we need this one? Not when you have an Apple, which is secular growth mode without the business cycle or the consumer cycle, and will only get better on both.

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