2 Undervalued Tech Stocks To Buy Now, 1 To Avoid

by: The Hedge Zone

More than other corners of the investment universe, technology companies operate in a fast-paced environment that requires consistent innovation and reinvention, lest their products succumb to obsolescence. This is particularly the case when a game changer like Facebook (NASDAQ:FB) or the iPhone storms onto the scene.

The dynamism of its related industries makes tech an especially challenging area of investment. But certain companies today boast diverse products and services and a track record of excellence in innovation that investors can trust, which can keep those companies relevant for years to come. Names like Apple Inc. (NASDAQ:AAPL) and Microsoft Corporation (NASDAQ:MSFT) fit this mold.

But with the recent downturn, the market offers several outstanding blue chip technology companies at compelling prices. Below we have chosen two of our top picks. We also include one popular company that we feel is overly expensive, given the kind of selection available in the market.

Google Inc. (NASDAQ:GOOG) - Buy

Price: $580.47

52Wk Range: $480.60-$670.25

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Google (<a href='https://seekingalpha.com/symbol/GOOG' title='Alphabet, Inc. Cl C'>GOOG</a>) 5 Year ChartSource: Yahoo Finance

The Story: One of the world's most recognizable and well-respected brands has its hands in just about everything these days. And just as there is not much Google doesn't do, there seems to be even less that Google doesn't do well. Its foray into mobile with Android was a hit, and we eagerly anticipate the Google tablet Nexus 7. Further ventures into social search and networking, cloud computing, and enhanced monetization of mobile search include just a small sampling of things in store for Google in the days ahead. While there is certainly a lot of competition in Google's market segments, we like its chances against Apple, Microsoft, and other online services companies that it has traditionally dominated like Yahoo! Inc. (YHOO).

The Numbers: Google is trading in the middle of its 52-Week range and at compelling multiples—17.6 times trailing earnings and 11.5 times forward 2013 earnings. Its five-year average P/E is approximately 30, so current multiples are at historic lows (not unlike many stocks right now, however). The valuation is decent, but one of Google's most compelling attribute from an investment perspective is its major cash hoard. According to Yahoo Finance, Google's balance sheet boasts $47.6 billion in cash, which comes out to $146/share or over 25% of its $189 billion market cap.

Notable Alternatives: If investors are turned off by Google's size with a nearly $200 billion market cap, they may want to look to niche areas within Google's vast spheres of influence. Names we like are Facebook for social networking, Netflix, Inc. (NASDAQ:NFLX)—particularly given its recent correction—for online media, and Baidu, Inc. (NASDAQ:BIDU) for the Chinese search market.

Intel Corporation (NASDAQ:INTC) - Buy

Price: $26.67

52Wk Range: $19.16-$29.27

Intel (<a href='https://seekingalpha.com/symbol/INTC' title='Intel Corporation'>INTC</a>) 5 Year ChartSource: Yahoo Finance

The Story: Intel is one of the world's leading chip makers and an early pioneer of much of the computing technology we enjoy today. Equipped with some of the brightest tech minds in the world and ample means to put them to use, innovation doesn't cease at Intel. In April, the company launched its third generation of Intel Core processors (Core i7) for notebooks and desktops. Last year, it stirred the tech world by announcing it had created the first 22nm 3D Tri-Gate Transistors, which promises to deliver meaningful advances in computing.

The decline of the PC and the rise of mobile have been Intel's Achilles heal, but the landscape is changing. Intel now powers MacBooks and PCs alike, as well as many mobile devices. Additionally, the rise of competing tablet computers, many of which are powered by Intel chips, is reinvigorating the brand as Intel takes market share from competitor Advanced Micro Devices, Inc. (NASDAQ:AMD).

The Numbers: Intel is priced at the upper-mid range of its 52-week range. At 11.3 times trailing earnings and 10 times forward 2013 earnings, it is priced attractively, particularly given its sizable dividend offering and consistent share buybacks. It is trading at 2.85 times its book value. We see a 25% upside from the current share price should the macro conditions stay relatively stable.

Notable Alternatives: Several smaller cap alternatives to Intel stand out in the chip sector, including Nvidia Corporation (NASDAQ:NVDA), Advanced Micro Devices, and Marvell Technology Group, Ltd. (NASDAQ:MRVL), but we strongly prefer Intel over them all, given its extensive history of innovation, industry leadership, its dividend, and healthy cash flow.

Amazon.com, Inc. (NASDAQ:AMZN) - Avoid

Price: $229.32

52Wk Range: $166.97-$246.71

Amazon (<a href='https://seekingalpha.com/symbol/AMZN' title='Amazon.com, Inc.'>AMZN</a>) 5 Year ChartSource: Yahoo Finance

The Story: There is no doubt that Amazon is a solid company with a rock solid business model that we feel can justify multiples above its peers. But regardless of how much we like the company, we simply cannot get behind its current sky high valuation. Additionally, with Microsoft and Google crowding the tablet space even further—and continuing to bring their own unique mobile universes to the table—we fear Amazon's Kindle and media store will see market share depreciation. We also see competition in other aspects of Amazon's business, such as in its cloud computing division (an area Google is also making a play for). Further concern centers on Amazon's declining margins and whether it can reverse this trend without compromising market share.

The Numbers: Amazon is priced at the upper end of its 52-week range, trading at 189.4 times trailing earnings and 89.2 times forward 2013 earnings, as well as over 14 times its book value. Its net margins are only a shade over 1% TTM, with its five-year net margins equaling 3%. Its return on equity (ROE) shows a similar trend, with ROE at 7.7% TTM and its five-year ROE at 28.4%. Amazon's narrowing margins could be a product of increased investment in the future of the company, but we think they reflect changes in the industry, particularly relating to the online consumer landscape. Given Amazon's place atop the throne of e-commerce, change is a concerning development for Amazon and its shareholders.

Notable Alternatives: Investors looking for a cheaper alternative to Amazon in e-commerce may want to look to eBay Inc. (NASDAQ:EBAY), which trades at 16.2 times trailing earnings. Online auctions seem to be making a resurgence (granted, eBay offers much more than an online auction place), so it is conceivable that the company could experience a boost from the hype. Investors should be mindful, however, that eBay is currently trading near its 52-week high.

Disclosure: I am long MSFT.