Following are the three major tech gainers from yesterday's trading session and a strategy to trade them going forward.
Microsoft Corp. (MSFT) gained 3.7% yesterday after speculations on the early launch of Windows 8. The company CEO Steve Ballmer is also scheduled to discuss Microsoft Office 365, (which is a subscription for cloud, or Internet-based, versions of many Microsoft Office programs) today. Trading at 9x next year consensus EPS, Microsoft remains an underappreciated story. Microsoft is taking a lot of new initiatives, which can drive meaningful growth over next few years. Some of the major ones are:
- Windows 8 launch, which will enable Microsoft's operating system to run on tablet computers like iPad, thus helping it to catch up in this nascent market. Further, it will also help Microsoft in nullifying the negative effect of tablet computer's share gain against traditional PCs.
- Office 365, which will be a Microsoft's answer to Google (GOOG) docs. This may be a very useful and low cost alternative for small businesses. It will also help reduce piracy (due to low cost) and may become a good app for mobile users (thus decreasing linkage between PC and Office sales).
- The Microsoft Nokia deal, which was announced in February this year. It will help Microsoft increase its presence on mobile platforms without any significant risk. Nokia (NOK) is the partner, which is taking on major risk in this deal.
Each of these initiatives is big enough to be a game changer for Microsoft and I don't think market is building in much positive impact from them. I think Microsoft offers an attractive risk reward for investors who can hold the stock for next couple of years.
Amazon.com Inc. (AMZN) gained 4.52% yesterday after Morgan Stanley added it to its best ideas list citing its underappreciated international growth potential. At 52x next year (Dec 12) consensus EPS, I find Amazon stock pricey. I understand the growth potential and current investment mode of Amazon (which is keeping earnings depressed), but current price seems to be already pricing in a lot of positives. Also, I don't agree that growth in international markets will come easy for Amazon without any significant competition from local players. I am neutral on the stock.
Apple Inc. (AAPL) gained yesterday after Morgan Stanley issued a positive research note on the company. The main argument by Morgan Stanley analyst is that iPad/iPhone production/shipments will increase going forward as the situation in Japan normalizes (post-earthquake). Apple will also be able to negotiate price cuts with component suppliers as component supply improves, thus helping the margins. Apple is trading at 11.5x next year consensus EPS estimates. The stock has corrected recently due to buy side skepticism over sell side iPhone production forecasts. Although some of the sell side numbers are yet to come down, I believe buy side is already pricing the negatives. The stock is a good value buy at these levels and offers attractive risk-reward over the medium to long term.