4 Mid-Cap Tech Stocks To Buy In 2012, 1 To Avoid

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Includes: BBRY, GOOG, MSFT, NOK, NUAN, WDC
by: Rash Menaria

The following is a list of 4 midcap technology stocks which are likely to show good stock price appreciation in 2012:

Nuance Communications (NUAN): Nuance is the market leader in speech recognition space. After Siri’s success on Apple’s (AAPL) iPhone 4S, it is clear that speech recognition is the idea whose time has come. Siri requires NUAN’s transcription ability to operate. The success of Siri on the iPhone 4S means NUAN’s speech recognition technology is ready for mainstream adoption - which could boost the demand significantly. Siri on the iPhone 4S has received very positive responses and going forward I believe Siri would be an inevitable feature in all smart phones across different manufacturers. There are growing expectations among investors that a future Apple TV could also be powered by Siri, which is a positive for Nuance. Other than a big Siri opportunity also, NUAN’s business is performing very well. Trading at 14.2x forward PE, I believe the stock is undervalued and is not completely building in the upside, which mainstream adoption of its technology can provide.

Sandisk (SNDK): SanDisk Corporation is engaged in designing, developing and manufacturing data storage solutions in a range of form factors using the flash memory, controller and firmware technologies. The Company’s products are used in a range of consumer electronics devices, such as mobile phones, tablets, eReaders, global positioning system devices, gaming systems, imaging devices and computing platforms. Sandisk’s EPS forecast for the current year is $4.59 and next year is $5.07. According to the consensus estimates, its top line is expected to grow 17.30% next year.

In the near term, SanDisk is likely to benefit from an improved product mix as solid state drive adoption in PCs is accelerating due to the expected hard disk drive shortage caused by Thai floods. While the Thailand floods have negatively affected DRAM and PC, they are a net positive for the NAND market.

In the medium term SanDisk’s exposure to high growth NAND Flash market and increasing competitive barrier to entry in the NAND market are likely to bode well for SanDisk. Unlike DRAM, NAND is no longer a commodity business. Technical issues create huge variations in performance between solutions and higher performance solutions enabled by advanced controllers command high premiums.

SanDisk is financially strong with ~$2.5bn or $10/share in short term cash and $2.7bn or $11/share in long term investments offset by $1.6bn or $6.50/share in long term debt. Adjusted for cash Sandisk is trading at less than 6x FY12 earnings which is attractive given its leadership position in the industry.

Western Digital (WDC): Western Digital Corporation designs, develops, manufactures and sells hard drives. It sells its products worldwide to original equipment manufacturers and original design manufacturers for use in computer systems, subsystems or consumer electronics devices, and to distributors, resellers and retailers. Its hard drives are used in desktop computers, notebook computers, and enterprise applications such as servers, workstations, network attached storage, storage area networks and video surveillance equipment. Western Digital’s EPS forecast for the current year is -1.37 and next year is 4.00. According to the consensus estimates, its top line is expected to decline 27.20% current year and grow 47.20% next year.

A lot of positive developments have taken place for Western Digital in the recent past. The company has received conditional approval of the Hitachi deal by the EC that could yield $5-$6 in EPS in FY2012 once the deal closes and synergies are recognized. Further, the recently announced long-term supply agreement with TDK secures enough heads and sliders for quarterly HDD production to return to ~30M units, or roughly 50% of its pre-flood capacity. WDC badly needed this as after the recent Thai floods all of its slider production facilities were under water. Western Digital is currently trading at an undemanding valuation of 6.8x 2013e EPS. Further there a good chance of upward revision in the estimates going forward as the market realises potential of the Hitachi deal. I am bullish on the stock from a medium time perspective and see good upside if one can hold the stock for the next one or two years.

Nokia (NOK): Nokia is another stock, which is a good buy after the recent launch of its WP7 series of phones. Nokia unveiled its first two Windows Phone smart devices, the Lumia ($588) and 710 ($378) at the recent Nokia World Event. In addition it also launched four premium S40 Mobile Phones ranging from $84-$161, two of which have comparable hardware/ User Experience to mid-tier smart phones.

I find the products very compelling and believe they can see good consumer traction. This launch is likely the first step in Nokia’s turnaround and I believe the company would start seeing the positive trends from here onwards. With consensus sell side expecting flat year-over-year revenue and earnings in the next year, I don’t believe the market is pricing in any big positives from Nokia. I believe it is a good opportunity to initiate a long position in the company before the broader market starts pricing in the upside potential.

One Technology stock which is likely to underperform the broader markets in 2012 is Research in Motion (RIMM). Although RIMM’s stock price has corrected significantly and there are rumors about acquisition, I feel RIMM is unlikely to find any suitor.

RIMM’s stock price has corrected 75% in 2011 and it is now trading below its book value. Continued market share losses are a serious concern for the company. I see a further downside in RIMM’s share price unless there are any signs of market share stabilization. I also don’t see any chance of RIMM’s acquisition. The three major players, which will likely dominate the complete smart phone ecosystem going forward, are Apple, the Nokia-Microsoft (MSFT) combination and the Google (GOOG)-Motorola (MMI) combination. It will be very difficult for any other player to stand the competition and hence I doubt if anyone will be interested in RIMM’s business/assets.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.