I have written a number of short and long ideas on SA in the last couple of months. A lot of my ideas have been on the short side, given that I think that the markets are a bit overvalued mainly due to the low interest rates and the Fed backstop. However, even in an overvalued market, you can find some good value opportunities. I am listing out some of my top technology picks that the investors might want to look to buy, even during these abnormal times. I think that the market has not realized its true potential yet and these stocks can give a great return, as the earnings start to match up to my projections. Note there will always be a degree of bias, since an analyst or asset manager will always know a specific sector or an industry more than the others. This will give one a greater sense of confidence to him, than the others who do not follow that sector closely. This can also lead to overconfidence since most analysts are sector focused and do not have a clue about how the larger world is doing. Most analysts spend day and night analyzing the news related to one sector, without having an understanding about the broader macro problems and opportunities. This makes a person who analyzes a number of industries a better investor because one can compare the risk/reward across the broader economy. In the future articles I will also list out good buy opportunities in other industries that I follow.
This memory maker is set to benefit from the changing competitive dynamics in the DRAM and NAND industry. The memory industry has seen continuous exits by memory players over the last decade and a half. Now only 4 main companies control the entire $50 billion memory market. The industry has been marked by extreme peaks and troughs which have led to bankruptcies of the weaker players. The latest big company to exist was Elpida which was bought by Micron for a cheap price. Taiwanese memory makers have also more or less collapsed. They are now either doing foundry work or making niche memory products.
Micron is now the only western manufacturer of memory chips which makes it a strategic asset for the US government. The stock is still being priced like a cyclical memory stock. I think that Micron has the potential to double or triple as earnings go up. There are already signs of that happening with DRAM prices following the upward trend in NAND prices. Micron has also gained market share in both DRAM and NAND memory. It also has a good lead on newer memory products.
Read my full long thesis about why you should buy Micron.
Intel is the world's largest semiconductor company by revenues, with a dominant market share in PC and server processor chips. The company has decimated the competition (AMD) through sheer ruthlessness which would border on cruelty. Intel has outspent and out researched AMD to become a monopoly supplier of processor chips for PCs and servers. The company spends almost $10 billion a year on R&D and more than $10 billion a year on building new semiconductor fabs. The company has got a huge lead in the semi process technology, setting up 3 fabs using the 22nm technology. The stock however trades at less than a 10 P/E and the dividend yield is more than 4%. The stock price has gone pretty much nowhere in the last decade. The reason is the decline in overall PC sales which has led to a mauling of PC stocks like Dell (DELL), Hewlett-Packard (HPQ) and Microsoft (MSFT). I think that the selling of these stocks has been a bit extreme and all three offer good value. Dell is all set to be taken private and HP may rise more as the company looks to sells the assets to unlock value.
Intel has missed the boat with respect to the exponential growth in tablets and smartphones. However the company is putting its massive hoard of cash to catch up. The company is trying to change its product line so that its processors can be used in smartphones and tablets which require much more emphasis on power saving than on processor power. I think it's only a matter of time that Intel carves a huge market share in tablets and smartphones. Also I think that the death of PC story is exaggerated. PC makers are striking back through tablet PC hybrids. Intel with its deep relationship with giants like Lenovo, HP should get design wins in their newer products.
Read my full long thesis about why you should buy Intel.
Zynga is a more risky buy than the above two companies as the company is making a major transition after cutting the umbilical cord with Facebook (FB). The stock has been slaughtered after its IPO and is down almost 85% from its peak value. The company has faced problems with monetization and there are concerns on how it will survive without Facebook. However, the recent results have given good signs about its future. The company already gets 21% of its revenues from mobile and its recent introductions like Farmville 2 have been a surprising success. The company is maturing and cutting costs to focus more on profits. The company has shut down nonviable games and studios and is concentrating on fewer higher money making games. The company's rigorous 6 months' testing of Farmville 2 reaped rewards in terms of greater user participation. The company's own network is proving a source of strength and advertising revenues are really starting to ramp up (35% y/y growth in 4Q12).
The company has a massive cash hoard of $1.2 billion which accounts for almost 50% of the company's value. Zynga is not losing money which means that the cash is not going away anytime soon. Its entry into the real money gaming industry has the potential to generate a massive amount of profits, as it already has millions of users playing its Zynga Poker game.
Read my full bullish thesis on buying Zynga.
Microsoft is the world's third largest technology company by market capitalization having recently ceded the top 2 rankings to Google (GOOG) and Apple (AAPL). Microsoft like Intel has been hurt by news of declining PC sales and the stock trades much below the market P/E. It is hard to think of a company which sells software across such a wide spectrum of functionality and has such a big user base. The company's Windows operating system and Office suite of applications are dominant in PCs and servers and generate billions of dollars in FCF every year. The company is a software behemoth with a strong presence in both the enterprise and consumer segments. I can't think of a single company which is strong in both segments. Apple, Google, Facebook are strong in consumer technology, while other big tech companies such as IBM (IBM) , Oracle (ORCL), Cisco (CSCO) are strong in enterprise. No other big tech company has managed to be successful in both segments for a sustained period of time.
Microsoft has woken from its slumber and is now using its massive resources to capture the growing tablet and smartphone software markets. The company's newest version of the ubiquitous Windows Operating System is optimized to run on all the major computing devices. The company has already roped in one of the biggest mobile companies Nokia (NOK) to exclusively sell Windows 8 on its smartphones. The company has also released tablets using both ARM and Intel processors. Though the initial reviews are nothing great, the important thing is that Microsoft is not sitting on its toes. Its partners will come up with better products (they already are) and it will gain by selling the software licenses. I think Microsoft will continue to be one of the top technology companies due to its unique position and its low valuation also provides a good entry point for investors.
Read my full bullish thesis on buying Microsoft.