These 2 Tech Stocks Are Long-Term Buys

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Includes: CSCO, MU
by: Amal Singh

By 2016, it is estimated that annual IP traffic will reach 1.3 trillion gigabytes. This expected growth has created opportunities for various companies providing web-enabled solutions. The growth in Internet traffic is mainly due to growth of community websites, Internet-enabled handheld devices, smartphones, Wi-Fi corridors etc.

The existing market for software and hardware companies is expected to expand further with the advent of cloud computing. The cloud computing market is projected to grow by 19% to $131 billion in 2013, as predicted by Gartner. The demand for cloud computing is immense, but initial adoption by customers was slow since data security was a concern.

The cloud market is a boon for companies that provide various solutions like storage, cyber security software, and business solution software. Two companies that have done well to benefit from this market are Cisco (NASDAQ:CSCO) and Micron Technology (NASDAQ:MU).

Cisco - The cloud giant

Cisco Systems is an established name that dominates the market for routers, switches, networking equipments, etc. It is broadening its horizon and is focusing on cloud computing with its gamut of products. The company's acquisitions illustrate its motivation to enhance its product portfolio for cloud and networking.

Few acquisitions of Cisco in the past

Name

Product / Services

Value

1

Cloupia

Cloud Management

$125 million

2

Meraki

Cloud Management

$1.2 billion

3

vCider

Networking

4

Cariden

Networking

$141 million

5

BroadHop

Cloud Programming

Click to enlarge

As a result of these acquisitions, the company has been able to quickly increase revenue in new markets while maintaining its position in its traditional business.

Cisco's fourth-quarter results were strong with a rise in revenue and earnings as compared to the prior year. The company reported revenue of $12.4 billion, up 6% from last year. The company's bottom line came in at $2.3 billion, or $0.42 per share, as against $1.9 billion, or $0.36 per share, in the year-ago quarter. Cisco also spent $2.1 billion on dividend and stock repurchase.

Cisco has increased its dividend by 180% since 2011 and has been generating record revenue for nine straight quarters. If you are an investor for a technology stock to hold for the long term, look no further than Cisco.

Micron - Benefiting from data storage

The growth in the storage market due to the data boom is benefiting companies like Micron, which manufactures and designs an array of products used in data storage. Products like flash memory (NAND) and dynamic random-access memory (DRAM) that are used for storage have been in high demand for use as storage in computers and servers.

From an investor's perspective, it's interesting to see that the company has been improving on its margins by cutting costs. Micron stopped production of LEDs and sold its wafer manufacturing facility in Italy to push up margins. Profits also improved due to an increase in NAND and DRAM memory prices.

In the third-quarter earnings report, revenue grew sequentially to $2.3 billion from $2.1 billion in the preceding one. The company also emerged with a profit of $43 million as compared to a loss of $286 million in the previous quarter.

As a result of competition from bigger players, Micron has been decreasing the production of its chips to keep prices stable. This strategic decision reduces the possibility of oversupply and increasing inventory costs, which can damage profits. Moreover, despite a 16% price hike, the company's sales of DRAM and NAND chips increased 6% and 7%, respectively. Despite the PC market fading, the DRAM market is witnessing appreciable growth, mainly due to growth in areas like mobile, tablets and most significantly -- data centers.

Data centers and servers in the cloud require massive storage capabilities. This is leading to increased demand for Micron's new SSDs (Solid State Drives). Micron's P400m can allow a single server to manage storage data in petabytes (1048576 Gigabytes). Micron P400m signifies the company's intention of tapping the big data market.

The company recently announced its acquisition of Elpida, which was a struggling DRAM player in Japan. This acquisition beefs up its memory portfolio, as it includes a 300mm DRAM fabrication plant. It had also acquired 65% stake in Rexchip. Micron is now enriched with the technical staff of Elpida and Rexchip, as a result of which it is cutting 5% of its employee base. This is a cost saving measure that should lead to higher margins while keeping productivity intact.

My take

Both Cisco and Micron are positioned differently to benefit from the growth of data. While Cisco is looking to capitalize on the market through acquisitions by focusing on both hardware and software, Micron is looking good to benefit from growth in storage as a result of the data boom.

At a trailing P/E of 13x and with a solid dividend yield of 2.80%, Cisco looks like a decent buy at current levels. Micron, on the other hand, isn't profitable on a trailing 12-month basis yet but the company's cost cutting moves and prospects in storage look good, and that's why investors should take a look at it as well.

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.