What follows is a list of technology companies that cover a variety of industries: communication equipment, software, gaming and graphics software. These firms all have upside of 20% or more. I am most bullish about Qualcomm due to its wide spread between the past and forward earnings multiples, coupled with its strong brand. While Microsoft has significant opportunities in cloud computing, Activision Blizzard has the potential to yield the highest risk-adjusted returns from concerns over World of Warcraft churn.
Activision Blizzard (NASDAQ:ATVI)
Activision trades at a respective 13.8x and 12x past and forward earnings with a dividend yield of 1.4%.
Consensus estimates for Activision's EPS forecast that it will grow by 3.2% to $0.96 in 2012 and then by 14.6% and 9.1% in the following two years. Modeling a CAGR of 8.9% for EPS over the next three years and then discounting backward by a WACC of 9% yields a fair value figure of $15.32, implying 20.3% upside. The company set multiple records in 2011, with over $3.5B in operating cash flow generating and $3B returns to shareholders. The company also maintains its lead as the most profitable and largest third-party entertainment company. New franchises, like Skylanders have delivered strong execution, alleviating fears about World of Warcraft subscriber instability. In fact, "Call of Duty: Modern Warfare 4" was the best-selling game ever in a single year. I strongly recommend an investment.
Microsoft trades at a respective 9.2x and 6.6x past and forward earnings, with a dividend yield of 2.1%.
Consensus estimates for Microsoft's EPS forecast that it will decline by 0.4% to $2.68 in 2012 and then grow by 11.6% and 11% in the following two years. Assuming a multiple of 13x and a conservative 2013 EPS of $2.95, the rough intrinsic value of the stock is $38.35, implying 20% upside. The company had a solid start to 2012 with revenue growth across all segments. Office 365 represents a significant catalyst, while the partnership with Nokia (NYSE:NOK) has ensured survival in the competitive mobile landscape. This is another solid "buy".
Qualcomm trades at a respective 23.9x and 16x past and forward earnings with a dividend yield of 1.3%.
Consensus estimates for Qualcomm's EPS forecast that it will grow by 16.9% to $3.74 in 2012 and then by 11% and 13.5% in the following two years. Assuming a multiple of 20x and a conservative 2013 EPS of $4.12, the rough intrinsic value of the stock is $82.40, implying 24.3% upside. Like Microsoft, the firm similarly had a strong start to the year. End market demand is picking up quicker than some feared, and management is further well exposed to favorable trends in 3G. Management also has the opportunity to significantly boost ROE since free cash flow yield stands at around 4.2%. Yet another "buy".
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: The distributor of this research report, Gould Partners, manages Takeover Analyst and is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence.