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Steve Cohen is the founder of SAC Capital Advisors, a Stamford, Connecticut,-based hedge fund managing ~$14 billion in assets. The firm has posted an enviable 30% average annual return for investors from 1992-2010.

His top tech picks are particularly interesting. His top five tech picks (see table below) have returned 32% on average versus Nasdaq's 16% YTD gains. The following is a list of five tech stocks in which SAC Capital has significant holdings. I believe Baidu and Google are good growth stories available at reasonable valuations, while eBay is a good turnaround bet. However, I am a bit skeptical about Apple's prospects after the recent rally and have a neutral rating on the stock. I also don't like LinkedIn because of its high valuations and increasing competition from Branchout. Hence I will avoid it.

Company Name

Ticker

Shares Held - 12/31/2011

Apple Inc.

AAPL

1,068,503

Baidu.com, Inc.

BIDU

1,216,600

Google Inc.

GOOG

191,699

Linkedin Corporation

LNKD

710,965

eBay Inc.

EBAY

1,010,611

Source: 13F filing.

Google is the world's No. 1 search engine and online advertising company. Google has seen good growth since its IPO and if we go by consensus estimates, it is likely to post high teens plus growth rate in the near future.

Table: Google Inc. income statement/estimates (all figures in million except EPS data and gross margins)

FY-Dec.10

FY-Dec.11

FY-Dec.12 (Consensus Est.)

FY-Dec.13 (Consensus Est.)

FY-Dec.14 (Consensus Est.)

Revenue

22,004

29,094

35,387

42,026

48,070

Gross Margin (%)

86.23

78.11

76.03

75.85

77.73

EBIT

11,757

14,216

17,428

19,970

23,235

Operating Profit

11,757

14,216

17,328

21,047

24,202

EBITDA

13,153

16,067

19,034

22,623

26,507

Pre-tax Profit

12,172

14,800

16,818

20,169

23,122

Net Income

9,572

11,798

13,917

16,568

19,300

Reported Net Profit

8,505

9,737

12,206

14,773

17,516

Reported Pre-tax Profit

10,796

12,326

15,493

18,767

22,402

EPS - Fully Reported

26.31

29.76

36.85

44.04

51.55

EPS - Growth Rates

13.1%

23.8%

19.5%

17.1%

Source: Thomson Reuters.

In the near term, improving macros are likely to drive advertising revenues for Google. One of the big reasons for Google's year to date underperformance was poor Q4 results. I believe macro environment has significantly improved since Q42011 and this will likely reflect in the company's upcoming Q1 results, removing some of the overhang.

In the medium term the opportunities in mobile and display markets are likely to drive growth.

  • Mobile is expected to be ~10% of Google's advertising sales in 2012. This segment has witnessed a huge growth in 2011 and there are now over 250 million Android devices in total across the world. Android's ecosystem is likely to continue expanding in the near term. Also, after the Motorola Mobility (MMI) acquisition, there is a possibility of Google coming up with an integrated hardware software product along the lines of products from Microsoft (MSFT)-Nokia (NOK) and Apple.
  • Display is another big opportunity for Google. Last quarter, Google announced that its total display business (including YouTube) had reached an annual revenue run rate of $5B. This means that Display will account for at least 14% of Google's topline in the current year if we go by current consensus topline estimate of $35bn. Even in the display end market, I like prospects of YouTube the most. Only 3% of current YouTube videos are monetized through video advertising. Given the secular shift of viewers from offline media to online, I believe online video advertising on YouTube has big potential. Google's recent announcement regarding the launch of 100 online video channels on YouTube that would feature new original programming is a very important strategic step in the right direction in getting quality content to attract advertisers. I see YouTube becoming a major growth driver for Google in the next few years.

In addition to the growth prospects in mobile and display, there are several initiatives at a nascent stage like Google Maps and Google Play which can become meaningful growth drivers for Google in the longer term.

One of the concerns investors have with Google is its limited success in the social space and the threat from Facebook (FB). Investors are worried that Facebook will gain advertisement dollars at the cost of Google. However, I don't see investor fear materializing. Social media and search constitute two fundamentally different end markets, both for consumers and advertisers. There is not much to fear unless Google loses its leadership position in search.

Google is currently trading at just 11.5x forward earnings, if we adjust for $123 cash holdings per share. With over 23.8% expected earnings growth in the current year, a cash pile of over $40 billion, a secular tailwind in the form of online advertising growth and clear market leadership position, I find Google's current valuations very low and recommend buying the stock.

Along with Google, I am bullish on Baidu and eBay. However, I would like to avoid Apple (neutral-rated) and LinkedIn (sell - rated). Here is my brief analysis on these stocks.

Baidu is the market leader in the Chinese Internet search market, with an 80% market share. The business has high barriers to entry and even Google wasn't able to meaningfully challenge Baidu's dominance in the past. Going forward, I believe Baidu can continue to post 50% plus growth for the next several years. China's total online advertising spend to GDP ratio is still five to eight years behind the U.S.

There is a secular tailwind for the leading search company, Baidu, which will be the likely beneficiary as normalization occurs. According to consensus estimates, Baidu is expected to post EPS of $4.61 in the current year and $6.49 in the next year. It is trading at 22.8x forward P/E, which is reasonable given its 50% growth rate. I have discussed Baidu's growth prospects and valuations in detail in a previous article. Please visit it for my detailed long thesis on Baidu.

eBay's core retailing business - Marketplace - seems to be making a turnaround, as it revamped the website and invested in new technologies ,recasting it as an online mall. eBay's payments unit, PayPal, is also performing strongly. Last quarter, the active Paypal accounts increased by 13% YoY and Paypal showed a strong increase of 130 bp in its margins. Both these businesses, PayPal and Marketplace, have more than 100 million active users, and the user base is growing steadily.

In addition to strong trends in its PayPal and marketplace businesses, eBay's new mobile payment systems seem to be making headway along with the robust growth of the e-commerce businesses. The mobile payment volume was $4 billion in 2011, five times more than its previous year's volume and is estimated to reach $7 billion in 2012.

Although eBay's guidance for 2012 was mixed, this was mainly to do with conservatism on the part of management, particularly given the eurozone uncertainty. I recommend buying the stock from a medium-term perspective, as the turnaround of its core marketplace business continues to attract more and more consumers.

Apple is a good company and its business fundamentals are going in the right direction as it continues to gain market share in the fast growing smart phone and tablet space. However, I am a bit skeptical on the stock after its recent run-up. I believe most of the positives are now already priced into the stock. Going forward, my key concern with the stock is declining iPhone sales in the coming quarters, as I have described in a previous article. I have a neutral rating on the stock.

LinkedIn is a good sell candidate at current levels. I expect LinkedIn to see some serious competition from Branchout going forward. Branchout is LinkedIn's competitor and uses Facebook as a platform. It now has over 12.5 million monthly active users, up from just 1 million at the beginning of the year. Branchout's rapid growth poses a big risk to LinkedIn. Its user friendly interface and utility in terms of serving both the low-end, as well as high-end job market makes it worthy competition for LinkedIn.

In a recent article - LinkedIn Now Has Some Serious Competition - I detailed the risks Branchout poses to LinkedIn. The broader investment community is clearly ignoring this threat, as is evident from LinkedIn's 47% YTD rise. I believe we are in for a big surprise on the downside. I expect a correction in LinkedIn's price - sooner rather than later.

Source: Steve Cohen's Top Tech Stocks: Why It Makes Sense To Buy Google