A Ratio-Based Analysis of the Best and Worst Technology Companies

by: Efsinvestment

The technology sector is an extremely dynamic sector which always offers new opportunities to investors. That is why it is one of the best sectors for speculative investing. Stocks of this sector may provide some quite impressive returns at times. Recently, we introduced the discounted earnings model to estimate fair values for technology stocks. In that article, we proved how Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) stocks were well-overpriced. Since then, things have gone wildly south for both companies. In a month, Apple and Google shares lost 7%, and 10%, respectively.

This time, we analyzed all large-cap U.S.-based companies in the technology sector, based on their market capitalizations, dividend yields, current and forward P/E ratios, EPS Growths, PEGs, profit margins and Beta values. Here are the results:

Highest Market Capitalization: Apple is the largest company with a current cap of 305.73$ billion, followed by Microsoft (NASDAQ:MSFT) [$210.73 billion] and International Business Machines Corp. (NYSE:IBM) [$202.37 billion].

Lowest Market Capitalization: Micron Technology (NASDAQ:MU) has a market cap of $10.44 billion, followed by NVIDIA Corp. (NASDAQ:NVDA) and SanDisk (SNDK), which have market caps of $10.77 billion and $10.96 billion, respectively.

The Best

Best Dividend Yield: CenturyLink (NYSE:CTL) has the best dividend yield of 7.34%, followed by AT&T (NYSE:T) [5.67%], and Verizon (NYSE:VZ) [5.23%]. Lowest P/E Ratio: Two of the memory chips companies have the lowest current P/E ratios. Micron Technology has the lowest P/E ratio of 7.14, followed by SanDisk [8.54] and Corning (NYSE:GLW) [8.6]. For a value investor, these three companies offer safe and high returns.

Lowest Forward P/E Ratio: Hewlett Packard (NYSE:HPQ) has the lowest forward P/E ratio of 6.99, followed by Micron Technology Inc. [7.5], and Dell (DELL) [8.41].

Lowest PEG: Micron Technology (MU) has the lowest PEG of 0.61, followed by SanDisk (SNDK) [0.68] and Corning (GLW) [0.74]. Note that, unlike the P/E ratio, PEG is based on predicted future profits.

Best EPS Growth in the Last Five Years: First Solar (NASDAQ:FSLR) has the highest EPS growth rate of 131.45%. CA Inc. (NASDAQ:CA) has an EPS growth rate of 100.23%. American Tower (NYSE:AMT) ranks third with an EPS growth rate of 72.66%.

Best Profit Margin: Average profit margin of the companies included in our research is 15.9%. The following companies have profit margins higher than 25%: Corning [53.62%], Altera Corp. (NASDAQ:ALTR) [40.06%], Microsoft [30.84%], QUALCOMM (NASDAQ:QCOM) [30.65%], Google [29.01%], Analog Devices (NASDAQ:ADI) [27.96%], SanDisk [26.94%], Intel Corp. [26.28%], and First Solar [25.91%].

Lowest Beta: Beta is a measure of volatility, indicating the correlation between the stock price and market index. The average Beta of the energy stocks included in our analysis is 1.1. A lower Beta usually means lower correlation with market index. Activision Blizzard (NASDAQ:ATVI) has the lowest Beta of 0.64, followed by Automatic Data Processing (NASDAQ:ADP) [0.66] and AT&T (T) [0.66].

The Worst

Worst Dividend Yield: While many well-reputed technology companies pay fat dividend checks, the following companies do not have such policy yet: Agilent (NYSE:A), Apple, Adobe, American Tower, Crown Castle International (NYSE:CCI), Salesforce (NYSE:CRM), Cognizant Technology (NASDAQ:CTSH), Citrix (NASDAQ:CTXS), Dell, EMC (EMC), First Solar, Intuit (NASDAQ:INTU), Juniper (NYSE:JNPR), Motorola (NYSE:MSI), Micron, NetApp (NASDAQ:NTAP), Nvidia, Sprint (NYSE:S), Sandisk, VMWare (NYSE:VMW), and Yahoo (YHOO) did not pay any dividends last year. Although, it is normal for high-growth companies (i.e. Micron) not to pay any dividends, for no-growth stocks, (i.e. Yahoo) zero-dividend policy indicates pessimistic view of management on future profits.

Highest P/E Ratio: A high P/E ratio above industry average may indicate an overvalued stock. Salesforce.com has the highest P/E ratio among technology companies [281.26], followed by VMWare [102.98], and Motorola Solutions[57.93].

Highest Forward P/E Ratio: Salesforce.com has the highest forward P/E ratio of 71.84, followed by Crown Castle Int. [54.41], and VMWare [40.05].

Highest PEG: Salesforce.com has the highest PEG of 9.68, followed by Verizon Communications, and CenturyLink, each of which have PEGs of 8.26 and 6.94, respectively. Such high levels of PEG ratios indicate overvalued stocks.

Worst EPS Growth in Last 5 years: The following companies had negative EPS growths in recent years: Sprint Nextel (S) had the worst EPS growth of -50.38%, followed by Motorola Solutions (MSI) [-43.03%], and Verizon (VZ) [-16.07%].

Worst Profit Margin: These companies have the lowest profit margins: Crown Castle International [-16.57%], Spring Nextel [-10.64%], Motorola Solutions [1.41%], and Salesforce.com [4.21%]. Razor thin profit margins are strong warning signals on the future of these stocks.

Highest Beta: A Beta higher than average Beta of the industry means a more volatile stock price. SanDisk [1.75], Motorola Solutions [1.71], NVIDIA Corp. [1.66], Adobe Systems [1.59], Juniper Networks[1.54] and VMWare [1.54] have significantly high Betas.


Weak Fundamentals: Among the technology companies, Motorola and Sprint have the worst ratios. Sprint is lagging behind AT&T and Verizon. Motorola ranks third in the following categories: highest P/E ratio, worst profit margin, worst EPS growth. Motorola stocks are also highly volatile. The company does not enough innovation skills to compete with others in the industry. Salesforce.com is priced like the crazy tech stocks of late 90s, therefore, should be avoided.

Strong Fundamentals: The tech titans, Microsoft and Intel have one of the best fundamentals. They are highly profitable and trading with exceptionally low P/E ratios. They are cash-rich, blue-chips paying safe and reliable dividends. Microsoft has a monopoly position in operating systems and office packages. There are rumors that Windows 8 will hit the markets like nothing before. Similar to Microsoft, Intel also has a near-monopoly position in the chip market. Intel's smaller competitor, AMD is struggling to catch up with Intel's innovation and profitability. Intel also has an investment portfolio that invests in innovative companies. We will update Seeking Alpha readers with Intel's latest high-tech positions in soon future.

If you are seeking high-dividends in tech companies, check out top 9 technology companies paying substantial dividends.

Charles Ortiz contributed to this article.

Disclosure: I am long MSFT, INTC.