By Matthew Kloster, Lead Editor
After analyzing the market over the past few weeks, anyone can see that the biggest buzz has been revolving around the technology industry. Several of the big-time players, along with some new very interesting companies, have been talked about over and over on investing sites and argued to the point of exhaustion. People cannot seem to put a finger on what is actually happening and what will happen in the coming months in this industry. Here is a clear analysis of what is happening with the most debated tech companies:
Apple, Inc. (NASDAQ:AAPL)
Apple continues to maintain its cult following for its products and product applications. Its iPod revolutionized the portable music player world, and the iPhone continues to be one of the best selling cell phones on the market. The iPad has also been a huge success, and leads the world of tablets. It seems to do almost everything right. Even its MacBook computers are seeing growth of around 15%, a market seemingly forgotten about. The corporate world is also starting to come around to the iPhone. The iPhone, however, will have to face tougher competition from the android phones, but will continue to experience strong sales especially after the early fall iPhone 5 revealing. Let's take a look at the numbers:
Apple has a large market cap of over 300B and an enterprise value of around 280B. The recent quarter results showed a 22.36% profit margin, quarterly revenue growth of 82.7%, gross profit of 25.68B, EBITDA of 36.73B, quarterly earnings growth of 94.8%, zero debt, and 29.23B in cash. These numbers are great. They also are expected to have growth of 28% EPS over the next three years. There is no reason to expect these growth rates to stop, and the price is expected to only go up over the coming year. Out of 54 analysts, 50 said this was either a strong buy or buy at the current price. The only thing that seems to be able to thwart a strong increase in price is Steve Jobs' health, but even that will not create a long term problem. Buy this stock and go long; it will climb back up.
Netflix, Inc. (NASDAQ:NFLX)
Netflix revolutionized the way people watch and rent movies. It offers movie rentals through the mail at a low $9.99/month subscription fee. Coupled with this, it offers hundreds of movies to stream instantly online, even though many of these are obscure. Netflix had its IPO in 2002 at a miniscule $15 per share compared to the current $294 at which it is trading. The big question with Netflix: Will competition take a large cut of its market? Right now sales are booming and growth is tremendous, but it was the first big player out of the gate. The large Starz contract is close to running out, and it is rumored they want considerably more money for shows that will be over a month old.
In the short term, I do not see a problem with Netflix. However, with concerns over competition and contracts, I do not think this stock will rise enough to garner a buy considering the risk. If you own the stock now I would not sell just yet, but definitely keep a close eye on it. It has a large market cap of $13B and a solid EPS of 3.48 along with a quarterly earnings growth of 86.6%. With a profit of $805M and a quarterly revenue growth of 45%, it’s hard to overlook some of the numbers when deciding not to buy. In my opinion there are better stocks to purchase out there that do not hold the risk of Netflix.
LinkedIn Corporation (NYSE:LNKD)
LinkedIn has received a lot of attention since its IPO, and for good reason. The stock almost tripled in price the first day and has slowly gone down since by 45%. With all of the volatility, this stock is an easy call. Wait for the price to completely settle and see what happens. The volatility is likely to continue for the next month at least, with shorting and buying in large quantities. The P/E is still at an outrageous 900 and the EPS is still below 10 cents. The company appears to be solid and will continue to grow, but the price will not show this for some time because of the overvaluation. Do not risk buying this stock until the price settles, which will take some time. Also, shorting may be a bad idea now that it has already dropped considerably and is close, but still above, the actual value. To see my full analysis of LinkedIn read 'IPO Market Back From the Dead'.
Google Inc. (NASDAQ:GOOG)
The price of Google stock has fallen over 22% since January highs well over $600 to its current price of $530. Google has experienced a quarterly earnings drop of 8% from last year, but still boasts an EPS of $25.75. Its business is still strong and it is putting out a line of cloud based computers along with the immense ad revenues (since it is essentially an advertising company with other hobbies). It is also growing in the display ad market and has moved ahead of Yahoo (NASDAQ:YHOO) to take a 14.7% market share. The stock drop seems to be partially due to the market, but not all of it.
What is for sure is that Google is undervalued right now, and greatly undervalued. The Google Wallet project is projected to catch on and be the new form of payment in a year or so. People in countries like Japan have been using this feature for a while with great success. If you want to take a peek at what the tech world in the U.S. will look like in a year or two, look at Japan now. The main point is – Google is doing fine and has grown steadily over the last five years by 20-30% each year. Wait for the stock to bottom out, then buy it and watch it climb back up into the $600s over the next 8-12 months. Buy and go long.
Salesforce.com Inc. (NYSE:CRM)
Salesforce.com is a very tricky stock to predict. The current price seems overvalued, but not by much, and the company is doing very well. Basically it seems like the numbers point towards an overvalued stock, but the growth it has seen, and the quick adoption of its services appears to show room for price growth. What do I do when I see this contradiction? I will call it a stock to hold for now. I am not ready to buy into the hype and overlook all of the numbers pointing towards an overvaluation.
The quarterly growth earnings were -97% for last quarter from last year with a trailing P/E of 415 and a forward P/E of 75. The EPS is also low, sitting at 0.34. However, sales are projected to increase by over 30% this year and 42% next year. Wait a little longer to see if the numbers and growth meet at a happy medium. I am tending to lean towards continued stock growth, so if I did buy, I would be sure to do so with a stop loss or put.
Baidu, Inc. (NASDAQ:BIDU)
Baidu is another stock that seems to have investors puzzled. Just like Salesforce.com, the price seems to be overvalued-- even with the recent drop in price with an actual value closer to $120 rather than the $146 at which it is currently trading. However, Baidu seems to have an endless market. It is the leading internet search provider in China, the most populous country in the world. China currently has more internet users than there are people in the United States, and the market is still far from its potential.
Like Google, Baidu generates most of its cash from advertising. It seems that the sky is the limit for this company-- even if the shares are a little overvalued now. Yes, it may drop some in price in the short term, but this seems to be a solid long term bet. As an investor, I would wait a week or so to see if the price keeps trickling down, but eventually buy and go long.
OpenTable is essentially a first mover in the online restaurant reservations market. Without fear of competition, it would be a definite buy and hold to make lots of money, but there will always be competition. It has the advantage of being the first mover and gained widespread use to over 20,000 restaurants worldwide, but it is charging a hefty price tag to the restaurants listed on its site. Charging $1 for each reservation booked on OpenTable and $0.25 for every reservation booked from the companies site gives restaurants a reason to look elsewhere once strong competition emerges. In order for OpenTable to continue its success, it must grab the market by the throat and make it hurt a company not to be on the platform.
There is no doubt the service it provides will be a mainstay and continue large growth rates. The current price of $86 is a little above fair value based on a discounted cash flow analysis, but growth without a strong competitor will be huge, and the price will definitely be on the rise. Many companies are scrambling to put together their own version of these services, and a company like Google would likely charge little to nothing for restaurants. That event could spell destruction for OpenTable. I am not convinced about this stock, and would not buy until I see these competitor schemes flop. If this happens, then buy the stock as it is sure to keep growing, since the industry is in the beginner phase and will grow tremendously.
Microsoft Corporation (NASDAQ:MSFT)
Microsoft appears to be another large market cap that is down, mainly because of the market right now. After it got to the top of the tech world, Microsoft basically stopped trying. Yes, it keeps releasing updated versions of its dominant OS and Office packages, but what has the company done exciting or noteworthy since 2000? I use Windows 7 and Office, but honestly-- it has not changed very much since it made its products the standard in the industry. All it needs to do is create some buzz or take some small risks to reap great rewards. It is seen now as a sluggish giant who puts out a product well after the first movers and has lackluster performance, whether the product is great or not. In my opinion the stock sits at a price ($27) that does not support much risk at all.
Everything has either remained steady by the numbers or seen moderate growth. With a dividend yield at 2.6%, I would buy this stock if I had extra money lying around and let it sit for a while. It seems to be a good long term investment because its phone OS is getting better with each release, a new gaming system will surely come out, and it will have great upside potential. This is coupled with its mainstay OS and software that will continue to generate large amounts of cash. With the upside potential, decent dividend yield, and low risk, buy this stock and go long. You will be able to tell a major drop in stock, if it happens, from a mile away and have time to sell.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.