What next for Infosys, Microsoft and Google?

Seven banks downgraded shares of Infosys.

The resignation of Dr Vishal Sikka as Infosys's CEO shocked the financial markets and triggered a 10 per cent plunge in the price of India's second largest outsourcing firm. Dr Sikka, a Stanford PhD in computer and a former top technologist at SAP, was handpicked by Infosys co-founder Narayana Murthy three years ago. Dr Sikka was unquestionably not a failure at Infosys, despite Murthy's disillusionment with his governance (and corporate jet setting out of Palo Alto). He boosted revenue by 25 per cent, courted top American corporate contracts, boosted margins and built several innovative software applications and IT services units. The board is clearly split and resents Murthy's interference even though the co-founders own only 12 per cent of the shares. Even the $2 billion share buyback lollipop did not rescue the shares from their free fall.
Infosys faces huge corporate governance, legal and business challenges, notably the Trump White House's hostility to H-1B visa primarily issued to Indian techies. The board holds Murthy responsible for Dr Sikka's departure. Seven banks downgraded the shares. It is probably best to stay away though the huge premium of the planned share buyback could present an opportunity in the future.
Infosys has underperformed the Sensex/Nifty indices by a staggering amount and is still not cheap at 15 times earnings, given its governance chaos, US immigration woes and the Darwinian pricing milieu in software services. True, Infosys traded at a five year average of 18 times earnings but its valuation derating is justified by both company and industry specific headwinds. Emerging markets technology companies should offer explosive secular growth, as Alibaba, Baidu and Tencent do but Infosys definitely does not.
Satya Nadella has had a fairy tale tenure as the CEO of the Evil Empire of Redmond, also known as Microsoft. The shares have more than doubled since Nadella succeeded Steve Ballmer (obviously Bill Gates is no penny pinching corporate scrooge like Narayana Murthy) as the firm's exponential growth in cloud computing in Azure has led to a historic valuation rerating of the shares. I believe any sell off in the Nasdaq is an opportunity to accumulate Microsoft, ideally at the 65-66 range. True, Azure revenues are still 5 per cent of total revenues (and one third Amazon AWS revenues) but the real growth in commercial cloud includes Azure, Office 365 and Dynamic CRM, which is no less than a $18 billion revenue growth engine and will replace legacy revenue streams. If Microsoft delivers EPS of $3.40, the shares are not expensive at 20.5 times forward earnings. Free cash flow per share next year could well be $4.50, especially as capex continues to fall. Microsoft will continue to purchase $10 billion shares (at least) in 2018 since fiscal 2017 stock purchases were $11.79 billion. In any case, enterprise software spending will be on a roll in 2017-19 and it will not surprise me to see Microsoft free cash flow yields surge to one third of global revenues. There is no reason Mister Softy cannot trade at 90 sometime in the next eighteen months.
Google's proprietary software algorithms enabled it to become an Internet search engine quasi-monopoly. The shares have corrected from their 1005 high to 932 as I write. Option strategies can enable an entry point in the 860-870 range, which I believe is optimal. Google will generate $105 billion in revenues in 2017 and grow EPS at least 20 per cent annual rate in the next three years. The share will trade at times forward earnings. Google dominates mobile search even as digital advertising emerges as a $200 billion global market. YouTube attracts 1.5 billion in monthly users and is now the world's most valuable video platform. Google Home, international (notably Asia Pacific and Latin America) and Pixel Game will help boost revenue and EPS growth rates. The pace of cloud adoption, artificial intelligence robotics will accelerate and boost Google's valuation metrics. Google has risen twelve fold since I first recommended the shares at its IPO in 2004 in this newspaper. This Silicon Valley legend should be a must own for every investor on the planet!
I first visited Google when it was a small, unknown firm founded by two Stanford techies in University Avenue, Palo Alto in 1998 - a long time ago in a galaxy far away. From driverless cars to robotics to artificial intelligence, Google will reshape our world. Google is a verb in the English language a mere two decades after its birth. Now that's awesome.