With a few exceptions, there have been a small number of companies that have been able to navigate the tough enterprise spending environment, which have hurt even some of the strongest tech names on the market. However, the environment can't stay sour forever. With industry experts anticipating a rebound in IT expenditures over the next several quarters, investors need to keep a watchful eye on these stocks, as they are certain to outperform.
Buy Oracle (ORCL)
Investors are still showing concern over Oracle's disappointing third-quarter results as revenue arrived more than 4% below Street estimates. Nevertheless, investors still have plenty to be excited about. Plus, even with the miss on revenue, the company still beat on profitability. Net income arrived at $2.5 billion, or $0.52 per share. Excluding items, earnings rose to $0.65 per share.
Investors also have to be excited about Oracle's prospects for the next quarter, especially since corporate enterprises will have more clarity about government spending. Oracle is also beginning to show that it is serious about entering the telecom space after having just announced plans to buy Tekelec from private equity owners.
This deal comes on the heels of Oracle having picked off Acme Packet (NASDAQ:APKT) to enter the session border control environment where Oracle now competes with (among others) Cisco. Management is showing how aggressive it plans to be to move this company forward. And investors should be excited about the Oracle's willingness to leave no stone unturned to find growth.
With 2013 earnings estimates being $2.69 per share, the stock is now trading at a P/E of just 12, or 6 below the S&P 500 average of stocks in Oracle's category. In a market where stocks often take off and never look back, Oracle is now giving opportunistic investors a second change to buy.
Buy Cisco (CSCO)
As with Oracle, Cisco has been on a shopping spree of its own. And I'm hoping that it doesn't stop spending just yet. The company understands that its future relies on these investments. And although Cisco's current routing and switching market share remains significant, evidence suggests that hardware solutions will fade out.
Cisco recognizes that companies will look to migrate towards software-based network solutions. To that end, the cloud has served as management's major focus, which makes sense as the cloud market is expected to triple over the next two years - growing to $177 billion. Bears argue that Cisco has been spending too much.
However, I think the company deserves the benefit of the doubt for these moves. Cisco is sitting on $46 billion in cash. And investors should be encouraged by the company's willingness to grow in areas where corporate enterprises are clearly heading. Besides, there are a couple of more moves this company can still make to really add pressure on the competition.
For now, Cisco is an absolute buy at current levels. This is even though the stock is percentage points away from a 52-week high. Also, with a strong balance sheet, respectable yield and very limited downside risk, Cisco will prove to be one of 2013's top stories. At minimum, $25 seems to be a fair valuation for the stock.
Buy EMC (EMC)
If enterprises are going to open their wallets, they're also going to look for ways to store more data and get their businesses into the cloud. No company is more prepared to handle these tasks than EMC. To that end, EMC has been delivering solid results. This is despite the fact that IT spending had not fully recovered, including posting 8% revenue growth, which also arrived 14% higher sequentially.
The fact that management was able to post such solid numbers in a poor spending environment indicates how highly regarded EMC's superior technology is. This also indicates that EMC remains a force within the sector and is gaining meaningful market share on rivals. Likewise, net income was solid; advancing 5% year over year to $870 million. Remarkably, high-end product revenue really stood out, rising 6% year over year and 14% sequentially.
Given EMC's strong market position and solid fundamentals, this stock is trading well below its long-term potential. At $23 per share, the stock is trading at just 12-time fiscal 2013 estimates and 11-times the 2014 estimate -- both of which are below EMC's historical trading average. With solid free-cash-flow and continued market improvements, these shares should reach $30 by the second half of this year.
Sell Microsoft (MSFT)
I recently suggested that it was time for Microsoft and CEO, Steve Ballmer to part ways. Many readers disagreed and suggested that the stock was doing well trading at $32. The very next day, the stock plummeted after IDC reported slumping PC sales. Microsoft was hit with a rash of downgrades, which impacted the stock by more than 12%.
While Microsoft has been making some strides and has improved in some key areas such as the cloud, the pace of the company's progress has not been enough to offset fears about its leverage. The fact that a significant portion of its profits come from Windows and Office is a concern. And unfortunately, the software-as-a-service market is beginning to squeeze the importance of those franchises. What does Microsoft have left?
Is the company still influential on tech? While Microsoft is indeed still very valuable, it's no secret that the Street would love the company more if it were under new management - let's make that clear. So what's the holdup? Granted, the company is able to boast solid cash flow.
Then again, what has Microsoft been able to accomplish with all of its cash? Microsoft has never had the reputation for effectively deploying its capital. The company seems to be going through the motions. And investors have to ask themselves if it makes sense to hold the stock.
With the second quarter under way, investors have received ample time to assess how some of the best tech companies on the market are performing. However, equally important, the market has gotten a glimpse of how corporations are allocating their enterprise budgets.
So far, with improved earnings, it seems IT spending has seen a slight rebound. The good news is, industry experts project that this will continue, especially since more companies are migrating their networks further into the cloud. To that end, here are a few Big Data titans that stand to benefit from this shift.
Hold Hewlett-Packard (HPQ)
Given the state of the PC industry, there's no way to suggest that HP is a "buy" at this point. However, I don't believe there are more down-side surprises, either. Plus, this company still has a strong printing business and is producing $12 billion in operating cash flow.
Meanwhile, the Street seems too quick to dismiss that HP actually posted recent earnings results that were "less bad" than expected. Revenue arrived at $28.4 billion; falling 6% year over year and 5% sequentially. However, this was enough to top Street estimates of $27.79 billion. Plus, the networking segment did well -- posting 4% year-over-year growth.
For that matter, this is an area where HP should see some improvement going forward. I recently discussed Meg Whitman's managerial ability and suggested that she deserves the benefit of the doubt. So far, she's proving this to be correct. To that end, she has restored some stability, direction and focus as evidenced by what the company has been able to do in the recent quarter.
At $20 per share, the stock is fairly valued. And with continued improvements, these shares can reach $25 in 12 to 18 months. While HP's improvement is not going to happen overnight, investors can be comfortable waiting while appreciating one of the best dividend yields on the market at 2.40%
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.