It can be hard to predict high growth for technology companies with high market shares. However, analysts have high growth expectations for three tech stocks in particular: Arrow Electronics (NYSE:ARW), EMC Corporation (EMC), and Hewlett Packard (NYSE:HPQ). All three have their reasons to potentially grow, but all three have a strong chance of falling short of their one year targets.
Arrow Electronics: 2.60% expected growth. Arrow has lost substantial stock value over the past three and a half months, peaking at $47.50 in May and trading now at $29. Arrow trades at a P/E ratio of only 6.01 and participates mainly in electronic components and enterprise services, which are hot industries to participate in. Arrow’s current EPS of $4.84 is a new high for ARW, as its earnings per share over the past few years has averaged about $2. Analysts expect Arrow to grow its earnings to $5.13 in 2011, which from a fundamental standpoint means that Arrow has to go up in value if the economic downturn ends. In addition, Arrow has a market cap of $3.34 billion with revenue of $21.7 billion expected for 2011. This makes it a prime target for acquisition by larger tech companies at a potentially high premium. Arrow’s one-year price target is 52.6 percent above its current price, which may be very likely if Arrow can meet its earnings estimates or be acquired for a high premium.
EMC Corporation: 47.55% expected growth. EMC Corporation is an IT infrastructure company. EMC is a leader in EMC's market, yet is still expected to have huge growth over the next year. EMC has a one year target of $31.59, which is almost 10 percent higher than its 52-week high of $28.73. Out of these three stocks, I believe that EMC has the lowest chance of meeting its price target. EMC’s earnings per share is expected to increase to $1.73 in 2012, but with high cap tech stocks with low P/Es flooding the market, there is a good chance that EMC will stagnate and become just another tech giant with disappointing growth.
Hewlett Packard: 40.03% expected growth. HP’s high expected growth stems mainly from analyst estimates not being readjusted after its precipitous fall announcing its new business plan. HP, however, still has potential to grow from either sticking to HP's core businesses by maintaining its market share, or by successfully implementing its new strategy. I wrote a post about the potential fate of HP. Hewlett Packard currently trades at a P/E ratio of 5.55, with earnings expected to stay level, HP is undervalued from a valuation standpoint. However, I believe that HP’s one year target of $33.09 will be scaled back once analysts are able to reevaluate its new strategic direction and its position in the cutthroat computer hardware space.
Technology sector stocks with high expected growth are hard to come by. Of these high-revenue companies, I believe that Arrow has the best chance of meeting its earnings target, with HP a distant second. I would like to emphasize that analyst opinion is not an end-all way to evaluate stocks, but it is important to use the opinions of others to help structure how you look for stocks to buy and how your analysis compares to fellow investors'.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.