Technology stocks move at an extremely fast pace with the continued development and innovation of software and hardware. When looking at the market sector for software, a few large names pop up that have a large percentage of market share compared to other technology stocks. Two of these giants are Microsoft Corporation (NASDAQ/MSFT) and Google Inc. (NASDAQ/GOOG).
While Microsoft controls the market sector for PCs, the online segment is certainly controlled by Google. The market share for Google in regards to the American Internet search market sector is approximately 67%, according to digital marketing and research firm comScore, as compared to Microsoft’s “Bing” search engine, which has only 15%. However, this market sector is extremely competitive and costly. That 15% for Microsoft, while double the market share from 2009, has cost the company a large amount of money.
In total, the online division for Microsoft has cost more than $5.0 billion since 2009. Technology stocks continually innovate and develop new methodologies. For those firms in the back of the pack, it is extremely expensive to try to overtake the leader. Usually technology stocks leapfrog over existing leaders through new innovations. This is how Google became the leader in the search engine market sector. However, Microsoft has not been able to innovate in-house. The latest results of some of its ideas have been costly, as we can see from a $6.2-billion write-down for the purchase of an online advertising agency made in 2007.
At the time, Microsoft spent $6.3 billion in cash to purchase aQuantive in an attempt to close the gap between it and Google. Since the purchase, the deal has been a failure for Microsoft, as it is now forced to write down most of that purchase. It goes to show that just because a firm might be good in one area, this strength doesn’t always translate into other businesses.
Chart courtesy of www.StockCharts.com.
Since the highs of the year, Microsoft was clearly overbought and was due for a pullback. Technology stocks can run past their fundamentals at times. In such instances in any market sector, patience is a virtue and waiting for pullbacks is the right strategy. Microsoft’s shares then sold off to its 50% retracement level, in which it found buyers to begin accumulating shares. As one can see, there currently is a wedge being formed. The break from this formation will be crucial in determining the next leg for the stock.
The costly attempts by Microsoft to gain against Google in the online market sector proved, once again, the difficulty in competing without coming up with a truly innovative product. When looking at technology stocks, obviously Microsoft does stand out in terms of providing a dividend that certainly adds some appeal for investors looking for yield. One has to truly understand why one is buying technology stocks, and the estimates for the market sector should be realistically based on the innovativeness of the upcoming product suite. Innovation will always drive a company to a leadership position.