Investing in technology companies is often looked at by investors as a quick way to realize a huge return on invested capital. In the last 15 years, we have witnessed the downside risk present in many high-growth tech companies as well. With market conditions trending downward given the unstable global economy, we examined five tech stocks to see if any are a buy right now:
Hewlett-Packard Company (HPQ)
HPQ, the second largest computer hardware sales company in the United States (by sales), has been a victim of internal turmoil recently, something that is reflected in the performance of the company’s stock price. Leo Apotheker, the company’s former CEO, planned to spin off its PC division in order to focus on other lines of business. These plans changed when he was ousted from the company last week. HPQ brought on former eBay (EBAY) chief Meg Whitman as CEO as the company hopes that she will be able to see the company through the difficult rebuilding process. With this change, leaders of the company have announced plans to keep the PC business.
Since Whitman took her position, the stock price has continued its decline and has fallen well below its five-year low as investor confidence in the company remains shaky. While there are many things working against the company, it does exhibit a low price to earnings ratio of 5.29, meaning that it may prove to be cheaper than competitors like Dell Inc. (DELL) and IBM (IBM) whose price to earnings ratios stand at 7.76 and 14.10, respectively. In spite of the discounted price, investors would do well to take a “wait and see” approach toward HPQ and the new management team before allocating a sizable portion of their equity portfolios to this stock.
SIRIUS XM Radio Inc. (SIRI)
After trading at over $60 per share during the dot-com boom of the early 2000’s, SIRI has fallen on more difficult times and has seen its stock price settle south of $5 per share for a majority of the last decade. During this time, the company has accumulated a large amount of debt and currently maintains a long term debt to equity measure of 6.06 times, much higher than competitors like Westwood One Inc. (WWON) at 3.56 times and Radio One Inc. (ROIAK) at 3.49 times.
SIRI offers consumers a discretionary product, something that may not bode well given the uncertain economic environment and falling consumer confidence levels. Despite this, the company’s commitment to innovation and its relationships with many top automakers should make it the top choice of many consumers for years to come.
Renren Inc. (RENN)
RENN, a Chinese social networking Internet platform that first traded in May of this year, has experienced a strong decline in price since its IPO for a multitude of reasons. Many investors considered RENN the “Facebook of China” and early trading reflected the optimism many investors felt for tech and social network stocks. This enthusiasm was tempered when it was discovered that the company revised down certain growth numbers, calling into question the validity of RENN’s financial reporting. In its filings, the company reported insufficient internal financial controls.
In relation to competitors like Sohu.com Inc. (SOHU) and Baidu.com, Inc. (BIDU), RENN’s operating margin is tight at just 10.09%. SOHU and BIDU report operating margins of 37.62% and 50.02%, respectively. Since the company’s gross margins generally fall in line with industry norms, it may be necessary for management to enact some measures of variable cost cutting to improve the bottom line. Both SOHU and BIDU, along with competitors like Shanda Interactive Entertainment Ltd. (SNDA) and Qihoo 360 Tech Co. Ltd. (QIHU) have historically delivered positive net income, something RENN has not yet been able to do.
In spite of the drawbacks and risks associated with the company, RENN offers investors the potential for future growth as the demand for social networks in China continues to expand rapidly. The company also stands to grow if it can successfully incorporate advertising into its revenue structure. Still, the questions surrounding the company, its management and the global equity markets make RENN an attractive play only for speculative investors.
Youku.com Inc. (YOKU)
YOKU has experienced an extreme downward trend since its December IPO, falling from a high of almost $70 to under $20. Partially contributing to the steep decline is the negative sentiment by many investors toward Chinese firms listed on U.S. exchanges. Although the company’s second quarter performance was much stronger than the same quarter a year before, the sell off in the stock shows that many analysts anticipated a larger step forward. Still revenue increased 178% versus the second quarter of 2010 and the net loss decreased by 55%.
The company’s return on equity trails competitors like Baidu.com, Inc. (BIDU) and SINA Corporation (SINA), whose returns on equity are 53.58% and -1.55%, respectively. YOKU’s return on equity is -28.71%. Additionally, the company’s negative operating margin of -39.84% is representative of the high costs associated with licensing content from TV and movie studios in China. Competitors like SINA and BIDU maintain operating margins of over 20%.
YOKU faces a very competitive marketplace with many of China’s top technology companies involved in one way or another. Additionally, YOKU must compete with up and coming firms that often utilize illegal (and free) channels to secure and distribute content, putting the company at an extreme competitive disadvantage. The market forces make YOKU an unattractive investment in the current economic environment.
Cisco Systems, Inc. (CSCO)
In recent periods, CSCO has realigned and re-focused many of its primary business lines in an attempt to reinvigorate itself amid increased competition and general economic turbulence. Earlier this month, at the company’s “Analyst Day," the company revised its long-term revenue growth guidance downward and also highlighted many of the changes it has enacted. The revised projection of between 5%-7% is far more conservative and realistic than the previously stated 12% to 17%.
In spite of tougher competition, CSCO has maintained strong margins, posting gross and operating margins of 61.83% and 20.04%, respectively. These figures outpace industry competitors like Alcatel-Lucent (ALU), which has a trailing twelve month gross margin of 35.52% and operating margin of 4.18%, and Hewlett Packard, which posted gross margin of 24.23% and operating margin of 10.15%. The company’s 14.19% return on equity falls in the mid-range of the industry, beating ALU (-8.84% return on equity) but falling short of HPQ (21.64% return on equity).
While management seems to have a strong grasp on the realities of the altered competitive landscape within the industry, the company and the stock price face strong barriers to further growth. Given the current state of the volatile equity markets and the execution risk present in the company’s new strategy, many investors may move out of their positions in CSCO in search of greater stability or greater upside potential.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.