The year 2012 has seen one of the best starts for stock markets in past several years. The rally is led by tech stocks, with NASDAQ gaining 13.51% YTD versus an 8.42% gain for the S&P 500 and 6.28% gains of the Dow Jones Industrial Average. Here are the five top large cap tech stocks which have significantly outperformed NASDAQ Year to Date.
% Price Change YTD
Applied Materials Inc.
Seagate Technology PLC
I believe Apple, Dell and Salesforce.com can be interesting buy candidates among the above stocks. However, I would avoid Seagate Technology and Applied Materials after the recent run up.
Apple reported excellent quarterly numbers last month, beating even the most optimistic estimates. Its guidance was also better than expected, with strong momentum in iPhone and iPad sales. Going forward, Apple has two good catalysts in 2012 in the form of the iPad3 and iPhone5 launches. From a medium- to long-term perspective, Apple's secular growth and market share gains in the smartphone and tablet space is likely to continue for the next several years. Apple's strategy of customer-centric innovation and launching products with potential to create whole new markets is still intact. If one goes by Steve Jobs' biography, Apple TV is likely the next such product in the line. At a valuation of just 9x forward earnings (adjusted for cash), Apple is trading at very attractive levels. I believe it is a good opportunity to go long the stock.
Dell Inc. is one of the world`s largest manufacturers of computers, with worldwide PC market share of ~13% and FY11 revenue of $61 billion. The company offers a full range of IT products and services including desktops, notebooks, PDAs, servers, storage systems, printers, and other peripherals, which it primarily sells to customers using a direct model. The company also provides services and resells third-party peripherals and software.
Recently, Dell reported a mixed January quarter. However, its guidance for 7% declines in the April quarterly revenues was disappointing, causing the stock to give away some of its YTD gains. I believe investors should utilize this opportunity to go long on the stock. Dell is still in the initial stages of transformation and such speed bumps are likely. However I am still bullish about the medium- to long-term prospects of the company.
Smarter business practices helped Dell improve its gross margins profile in 2011. Going forward, it is expected to continue as component pricing trends improve along with a shift in the revenue mix towards non-PC and value add solutions. With its enterprise storage better integrated, Dell could be a serious competitor in storage space, which offers long-term growth. Dell also announced the creation of a new software group, which I believe is another step towards transforming the company to more of a solution provider. Dell, with its strong balance sheet and cash flow generation could make strategic acquisitions and repurchase shares. All these factors indicate a strong medium-term outlook with accelerating revenue growth.
Salesforce.com recently reported excellent quarterly numbers which were better than consensus on every count. Revenues, billings, operating margins, cash flow from operations and EPS all came in better than expected. Billings growth was at 56%, a solid rebound from last quarter's 29%. The core Salesforce.com market is ~17 billion in size. Cloud currently accounts for just 25% of the market. This presents a secular long-term opportunity for high revenue and EPS growth for Salesforce.com and the company continues to deliver on it.
Seagate Technology appears to be a good short at current levels. Seagate Technology designs, manufactures, markets and sells hard disk drives. The stock has rallied over 65% YTD due to good results. Supply chain disruptions because of Thai floods helped Seagate a good amount and were primarily responsible for its earnings beat. The flooding has limited HDD supplies and caused an uptick in its ASPs. Seagate's facilities are still dry and operational, and hence it is benefiting from this situation. However, after a 65% YTD jump, Seagate's stock price is already pricing in most of the positives. Going forward, as its competitors recover from flooding in Thailand, I expect Seagate's stock price to underperform.
Applied Materials is a supplier of semiconductor and semiconductor-related fabrication equipment, providing nano manufacturing technology solutions to the global semiconductor, flat panel display, solar, and other industries. Applied Materials operates in four segments: Silicon, Fab Solutions, Display, and Energy and Environment Solutions.
I remain cautious on the stock despite of its Q1FY2012 earnings beat. Applied Materials guided for market share losses in ETCH and CMP equipment segments due to flat capex growth by DRAM customers. Non-semiconductor markets are expected to continue to remain weak. Applied Materials' EES segment reported declines in its margins for 1Q. And going ahead, the company has guided for a 40% decline in revenues over the previous quarter for this segment, based on the order bookings. Applied Materials' Display revenues were also weak for the quarter and further, are expected to decline by 25% q-q.
Applied Materials' 70% of revenues are derived from three customers and based on its current order book, it is expected to remain this way for 2H 2012. Such high customer concentration is another negative for Applied Materials. Overall the outlook for 2012 is mixed, with a strong foundry but weak non-semiconductor segment. Earnings growth is expected to be slower than the pure play semiconductor segment and Applied Materials is likely to underperform relative to its pure play peers.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.