Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GOOG over the next 72 hours.
One of the sectors of the market that absolutely fascinates me is the tech sector. It has had a huge run up over the last two years, but it is really the tale of two markets. On one hand you have the story stocks with nosebleed valuations selling at a 100 times earnings, producing nominal cash flow and priced at a huge multiple to their actual sales. “Cloud Computing” is one such thread with Salesforce (CRM) and VMWare (VMW) as examples of stocks whose “story” might have gotten way past their intrinsic value. LinkedIn (LNKD) is the first IPO and stock of what I am sure will be many more from the “social networking” story. On the other hand, you have companies growing actual earnings, cash flow and revenues at a excellent pace; yet being valued with multiples you normally see from the consumer staples sector. Apple is probably the best example of these stocks.
Here are three tech stocks exhibiting good growth and reasonable valuations that I think are worth considering as additions to your portfolio.
Broadcom (BRCM) -Broadcom Corporation designs, develops, and supplies semiconductors for wired and wireless communications. It provides a portfolio of system-on-a-chip and software solutions, which enable the delivery of voice, video, data, and multimedia content to mobile devices; consumer electronics devices in the home; and business networking products for the workplace, data centers, service providers, and carriers. The company serves the manufacturers of computing and networking equipment, consumer electronics and broadband access products, and mobile devices. Its broadband communications products include solutions for digital cables, satellite and Internet protocol (IP) set-top boxes, and media servers; cable and digital subscriber line modems and residential gateways; high definition televisions; high definition Blu-ray Disc players; and digital video recorders.
Valuation and Price Targets – Broadcom is selling at 13 times 2011’s projected earnings and a little over 12 times next year’s consensus. It has consistently beat earnings estimates each of the last four quarters. It is trading at less than a .8 PEG, has close to $3 of net cash per share, and is expected to grow revenues in the double digits both in 2011 and 2012. It is well positioned to take advantage of the continued growth of the wireless space. The company sells near the bottom of its five year valuation range based on P/E, P/S, P/B and P/CF. Broadcom has grown earnings an average of over 13% during the previous five years. BRCM is selling at $36.52. Price targets are $50 at Credit Suisse, $45 at S&P and JPM Morgan also has a target of $50.
Google (GOOG) - Google Inc. maintains an index of Web sites and other online content for users, advertisers, and Google network members and other content providers. It offers AdWords, an auction-based advertising program; AdSense program, which enables Web sites that are part of the Google Network to deliver ads from its AdWords advertisers; Google Display, a display advertising network that comprises the videos, text, images, and other interactive ads; DoubleClick Ad Exchange, a real-time auction marketplace for the trading of display ad space; and YouTube that provides video, interactive, and other ad formats for advertisers. The company also provides Google Mobile that optimizes Google's applications for mobile devices in browser and downloadable form; and enables advertisers to run search ad campaigns on mobile devices, as well as Google Local that provides local information on the Web; and Google Boost for small businesses to participate in the ads auction.
Valuation and Price Targets – Google sells at just over 15 times this year’s earnings and a little over 13 times 2012’s projected earnings. It is expected to grow revenues over the next two years at over 20% each year. Google has a pristine balance sheet, with almost $100 a share in net cash, and sells at less than a .9 PEG. GOOG is priced about the same as it was last summer despite good growth in earnings and revenues as well as huge success in Droid adoption in smartphones. GOOG is currently selling at $520.90, which is around 10 times next year’s projected earnings after stripping out net cash. Price targets are $700 at Credit Suisse and S&P, $673 at Piper Jaffray and $650 at Oppenheimer.
SanDisk (SNDK) - SanDisk Corporation designs, develops, manufactures, and markets NAND-based flash data storage card products that are used in various consumer electronics products. The company offers removable cards under the SanDisk Ultra and SanDisk Extreme brands; embedded products under the iNAND brand; universal serial bus (USB) drives under the Cruzer brand; flash-based digital media players under the Sansa brand; and wafers and components. Its removable card products are used in consumer electronics devices, such as mobile phones, digital cameras, gaming devices, and laptop computers; and embedded flash products in mobile phones, tablets, eReaders, global positioning system (GPS) devices, gaming systems, imaging devices, and computing platforms.
Valuation and Price Targets – SanDisk sells at 10.5 times expected 2011 earnings and under 10 times 2012's consensus eps of $4.64 a share. SNDK has handily beat earnings estimates each of the last four quarters. It also has had its 2011 and 2012’s consensus earnings lifted significantly over the past ninety days. Its PEG is just over .8, is priced at around 7.5 times operating cash flow, and has close to $15 in net cash per share on its balance sheet as of March. It is selling near the bottom of its five year valuation range based on P/E and P/CF. It also should benefit from new applications for flash memory over the long term. Sandisk is selling at $46. Price targets are $58 at S&P, $70 at Morgan Stanley and $60 at Think Equity.