6 Technology Stocks Below Target Prices Ready To Rumble, 1 To Tumble

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 |  Includes: AAPL, AMZN, AVGO, DVMT, EBAY, FSLR, GOOG, MSFT, WDC
by: Chris Lau

Many technology stocks are trading well below the average target price set by analysts. Investors using analyst target prices as a rationale for buying and selling stocks need to be cautious. Companies may forecast a strong future, yet a healthy balance sheet and a well-executed business plan are not sufficient reasons a stock will reach a target price. Greater scrutiny during the evaluation step of stock ownership is needed when other investors are risk-averse.

Europe’s troubles will weigh negatively on technology stocks. Will these companies reach the stock price set by analysts? 7 technology stocks are discussed.

Company

Target Price ($)

Dec 9 Price ($)

Target - Price ($)

Target - Price (%)

First Solar Inc

62.28

45.67

16.61

36.37%

Broadcom Corp-Cl A

41.10

30.82

10.28

33.35%

EMC Corp.

29.86

23.60

6.26

26.53%

Western Digital Corp

40.47

32.38

8.09

24.98%

Amazon.Com Inc

240.08

193.03

47.05

24.37%

eBay Inc.

38.64

31.64

7.00

22.12%

Microsoft Corp

31.08

25.60

5.48

21.41%

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1) First Solar (FSLR)

Sell.

First solar trades 36.37% below its $62.28 average target price. The solar energy sector was the worst place to be invested in during the 2011 year. Companies heavily exposed to solar power subsidies in Italy and Spain suddenly found unwilling buyers. Solar energy companies based in China were devastated with lower pricing and demand. First Solar found it was not immune either: shares are down 73.97% from its 52-wek high.

First Solar trades with a P/E of 7.51, but its competitors all trade with a multiple half that. Most recently, Berkshire Hathaway (BRK.A) bought First Solar’s 550-megawatt Topaz Solar Farm power plant. This helped shares rise 14.03% from its 52-week low.

Investors should be aware that Buffett bought the assets because it allows Berkshire to sell electricity higher than the ones given for new solar plants.

2) Broadcom Corp (BRCM)

Buy.

Broadcom closed at $30.82, 33.35% below its target price. Shares failed to break the $36 price-level twice in November. It is a resistance level that was tested on at least 5 occasions this year.

Negativity for Europe’s prospects is holding down shares. The company thinks its forecast takes into account weakness in Europe. The CEO, Scott McGregor, said that “To the extent it would have an impact on (the United States and Asia) it matters. But remember, expectations are already fairly low. I think a lot of the concern of Europe is already factored into people's plans."

Broadcom trades with a forward-P/E of 11.30.

3) EMC Corp. (EMC)

Buy.

EMC has a market cap of $48.04B and is widely held by a number of hedge funds. In its most recent earnings report in October, the company forecast revenue that was slightly below the street’s expectations.

If the company is able to navigate through the weakness in the global economy, then the upside of 26.53% will be reached. It should be noted that shares closed at $23.55, well above a $20 double bottom reached between August and the start of October.

4) Western Digital Corp (WDC)

Buy.

Western Digital traded up $6 over the past few weeks, after the company revised December guidance higher. Gross margins will be at the high end of the 18% to 23% range. The company expects to take a $225M-$275M charge for the Thailand flood damage (excluding any insurance recovery). A pull-back would make shares more attractive, even though the expectation is for shares to rise another 25%.

5) Amazon.Com Inc (AMZN)

Buy.

Conventional wisdom that high P/E stocks should sell-off is often used to justify a lower share price. Amazon.com is no exception to this commonly accepted argument. The stock trades around 20% below its 52-week target price, and is 24.37% below a target price set by analysts.

The Kindle Fire release will push the company’s margin to around 1%. The company hopes that consumers sign-up for an annual subscription to Amazon’s content. In the long-run, this should help margins as competitors fail to compete successfully with Amazon.

In the meantime, the company is releasing a price check app to compete effectively with bricks and mortar companies. Amazon is also stocking up on inventory for products in high demand. This move shows how the company is able to push traditional competitors behind.

6) eBay Inc. (EBAY)

Buy.

eBay shares are trading sideways at a range of between $27 and $34. The average target price is $38.64, 22.12% above its recent close. eBay has a P/E of 23, but its PayPal division keeps growing quarter after quarter (by number of transactions). PayPal now has 103 million registered users. The majority of eBay listings are fixed-price, e-commerce sales are growing for small businesses, and sales fraud is hardly ever encountered.

7) Microsoft Corp (MSFT)

Buy.

With a $216B market cap and a P/E of 9.35, Microsoft is expected to have 21.41% more upside. These metrics do not justify a higher share price is certain. Historically, upside is limited because great successes in product launches did not result in substantially higher share price. For example, Windows 7’s sales finally pushed shares up to $29, but investor interest in Apple (AAPL) and Google’s (GOOG) cloud and mobile strategy limited the enthusiasm for shares of Microsoft.

It is doubtful that Microsoft will reach the $31.08 target price, but downside is limited too.

Microsoft’s strong cash flow ensures regular dividend payments of $0.80 or 3.10% per share. This also limits the company’s ambition to be reinvigorated in cloud services or the mobile space. Microsoft makes products for those areas, but competitors are competing more effectively. Competitors are therefore being rewarded with higher multiples.

Disclosure: I am long MSFT.