We took a look at a few profit kings in the tech and software industries. Despite the current economic conditions, we found a few with either great recent earnings or potentially bright futures.
Ebix Inc. (EBIX): This software application firm operates offices worldwide across nations ranging from the U.S. to Australia, Singapore, China, Canada, New Zealand, Japan, and India, and provides software solutions to insurance agencies. Ebix recently released stellar quarterly results. Revenue increased 31.2% to $42.3 million year-over-year, earnings per share beat analysts’ expectation, hitting $0.53 per share, and operating cash flow reached $19.6 million, a year over year increase of 22.2%.
Those stellar numbers seem too good to be true – and they are. Multiple lawsuits were filed against the firm in July of this year for potentially falsifying its accounting numbers. As reported by Seeking Alpha, the firm has an unsustainable business model, with tax arbitrage that may not just be unsustainable, but illegal. Despite hiring Ernst & Young to handle internal controls, we don’t trust the firm or its management, and recommend a hard sell. Shares trade at $16.34 with a PE ratio of 11.1. Ebix commands a market cap of about $650 million at the time of this writing.
Activision Blizzard Inc. (ATVI): While it has been a weak year for the video game industry, we remain bullish on Activision Blizzard Inc. Activision has been able to command impressive cash flows since the Activision-Vivendi merger in 2008, and we don’t expect that to change anytime soon. World of Warcraft remains a gold mine for the firm, while its marquee franchise Call of Duty remains similarly lucrative. With Modern Warfare 3 releasing in November of this year, we expect Activision to generate generous profits at the end of 2011 and beginning of 2012.
The main concern we have with the firm is the impending release of Electronic Arts Inc.’s (ERTS) MMO The Old Republic, which is set to release in 2012. While World of Warcraft has been able to ward off competing MMOs such as Everquest and Guild Wars in the past, we think a large percentage of WOW’s subscriber base will be siphoned off by the impending release of The Old Republic. By combining the Star Wars name with developer Bioware’s proven track record in developing games such as Knights of the Old Republic and Mass Effect 2, we think EA has created the next big blockbuster in MMO gaming. Consequently, we expect Activision revenues to drop off due to loss of WOW subscriptions in the latter half of 2012. That loss in revenue should be offset by the release of new games in both the Starcraft and Diablo franchises in 2012, but we are concerned that Activision will not be able to make up for WOW’s lost revenue after 2012. We are confident in the firm’s earnings for 2011 and 2012, but we hope more games are in the pipeline to generate even greater revenue heading into 2013 and beyond. This is a definite short-term buy, and should be a long-term buy provided that Activision can make up for lost World of Warcraft revenue. Shares trade at $10.65 at the time of writing.
Cirrus Logic Inc. (CRUS) has built its reputation as a developer of integrated circuits and sells its products to a variety of consumer electronics manufacturers worldwide. The firm received some bad news last month when its earning were released; quarterly profit was about half of what it was one year prior and gross margins fell from 57% to 52% year over year. Consequently, the stock’s price dipped and investors worried whether the firm could meet expectations for the coming quarter.
While Cirrus did not have the best numbers the past few months, we remain optimistic on the firm because of the upcoming release of the iPhone 5. Apple Inc. (AAPL) is Cirrus’s largest customer, accounting for 53% of Cirrus’s business last quarter. The new iPhone is widely expected to be released in September, and the 22 million iPhone units some analysts expect to be sold in the first month should beef up revenue for suppliers such as Cirrus. We even think 22 million may be a bit conservative; according to AppleInsider, pent-up demand for the new iPhone could drive sales even higher, with 74% of Verizon (VZ) subscribers who plan to purchase a new iPhone planning to purchase the iPhone 5.We think Apple will see blockbuster sales with iPhone 5, and Cirrus will ride the revenue wave because of it. Shares trade at $13.09 at the time of writing.
Blackboard Inc. (BBBB), with a $1.5 billion market cap, has built a customer base among higher-education institutions that continue to return to the firm’s product year after year. Blackboard lists 30% of U.S. colleges as customers, and we expect that number to increase as schools become more reliant on the technology and ease of use Blackboard provides. The most impressive statistic Blackboard can boast is its 90% customer retention rate, which makes sense given the ease of communication it provides between professors and students.
We think Blackboard has plenty of untapped market potential that could lead to growth. However, the firm will have to pursue such growth more aggressively than before, as alternatives are beginning to appear on the market that could steal some of Blackboard’s potential customers. Free alternatives will become an increasingly great risk that could stunt growth, and many other imitations have appeared hoping to cash in on the market as well. Regardless, we believe Blackboard’s product is compelling enough to attract a large percentage of untapped higher-education institutions. The recent news of an investor group acquiring Blackboard has bumped up the stock’s share price, and we expect that number to continue increasing as the firm continues to spread its intuitive software. We recommend a buy on Blackboard. Shares trade at $42.07 at the time of writing.
Altera Corp. (ALTR): Of all the firms on our list, we are most optimistic about Altera. Altera produces “programmable logic device” chips, which are essentially high-end computer chips used across various hi-tech industries such as communications. The advanced nature of the programmable logic device chips are also their downfall; the chips have a high per-unit cost, making them less attractive to firms that have to produce on large scales.
Despite the high costs of the chips, we are bullish on Altera for the following reasons: Altera’s chip prices are beginning to fall compared to competing circuit-types, making the firm’s products more appealing; Altera has a very high customer retention rate as the chips’ software tends to be superior and customers don’t want to bother switching products and learning new software; and demand for Altera’s chips should continue as the U.S. wireless industry transitions to a 4G network and countries such as China and India continue to build on their 3G networks. India specifically could be a huge revenue generator for the firm.
As such, we think demand for Altera’s chips will increase, and the firm should see strong revenue increase as a result. Shares for Altera trade at $34.89, and the firm commands a market cap of $11.1 billion. We recommend a buy based on expectations of growth and revenue increase in both the U.S. and foreign markets.