Why do tech stocks build us up just to let us down? Technology’s track record is one of dramatic peaks and valleys for its investors. However, its most recent run-up seems to have more fundamentals behind it than many of the past periods of hype.
Corporate customers for tech products have considerable money to spend these days, and some true technological innovations are driving momentum. Tech will inevitably have pullbacks along the way, but signs are pointing positive.
Qualcomm Inc. and EMC Corp. are examples of technology firms likely to prosper no matter which way the corporate and technology winds may blow:
• Qualcomm (QCOM) semiconductors will be included in virtually all smart phones made by handset makers. It is the innovator of code division multiple access technology (CDMA), a standard used in wireless networks that include all 3G networks. For mobile phones to function on a CDMA-based network, handset makers must pay royalties to Qualcomm. It is also signing 4G royalty deals with manufacturers.
• EMC Corp. (EMC), the world’s largest data storage company, is certain to gain from the dramatic growth in digitizing all types of information and correspondence used by businesses. It has been shifting focus from storage hardware to software and services. Despite current and future competitors, the potential customer base for data is overwhelming, and EMC has plenty of cash flow to help propel it forward with innovations and acquisitions.
“While technology stocks have had a good run-up this year, I still do not view their price multiples as being that rich,” said Roger Kay, president of the Endpoint Technologies Associates Inc. consulting firm in Wayland, Mass. “You want to be a little careful because buying a stock at a really high price can be a disaster, but based on a benchmark of price and earnings, they still seem reasonable.”
He even believes that the high-profile stock of Apple Inc. (AAPL), despite its dramatic price increase, is not all that expensive when viewed in the context of its current and future earnings.
“Tech stocks stepped up their pace and momentum beginning last September and into this year because most people do not believe there is going to be a double-dip recession,” said Scott Kessler, senior director in information technology with Standard & Poor’s Equity Research in New York. “Companies feel more confident about making investments in technology.”
In addition, consumer companies such as Amazon.com and Apple continue to benefit from the public’s appetite for technology products such as smart phones, tablets and other devices, Kessler added.
“The two current massive waves taking place in technology investing are cloud computing and mobile computing, which will drive technology spending for many years to come,” said Robert Turner, chairman and chief investment officer of Turner Investment Partners in Berwyn, Pa. “Everyone wants to get rid of their hardware and software and instead outsource it to the cloud, while ultimately everyone will also have a mobile device in his hand that acts like a computer.”
Cloud computing is the general term for on-demand hosted services over the Internet that require only a computer and Internet access. The provider handles such functions that traditionally are handled by a client’s in-house hardware and software.
Among cloud computing firms, Salesforce.com Inc. (CRM), which coined the term “software as a service,” is the leader, said Turner. Vmware Inc. (VMW), a provider of virtualization software for servers, which is 80 percent owned by EMC, has also done well even though competition in the field is heating up, he added.
All three experts interviewed here remain high on prospects of the stock of global brand Apple, though acknowledging its potential is much discussed and hardly a surprising investment story. Turner believes that even if Apple is just able to retain its 18 percent share of the smart phone market, it will “do just fine.”
Both Kessler and Turner also admire the shares of previously mentioned Qualcomm and EMC.
Turner also recommends British-based ARM Holdings Plc (ARMH) because its licenses for intellectual property technology must be obtained by those companies that supply semiconductors used in cell phone handsets. Likely to benefit from an increase in data traffic are the stocks of Juniper Networks Inc. (JNPR), Acme Packet Inc. (APKT) and Aruba Networks Inc. (ARUN), he said.
Chip-maker Intel Corp. (INTC) is interesting to Kay because of its stock dividend, solid cash flow and relatively low price. In addition, Kessler believes diversified technology giants Oracle Corp. (ORCL) and Hewlett-Packard Co. (HPQ) will be in excellent positions to grow as the economy strengthens.
Looking overseas, Kessler likes the prospects of one tech firm in China and another in Israel:
• LDK Solar Co. Inc. (LDK) of China is a solar energy stock play on a long-term trend that favors alternative energy, especially with rising oil prices gaining headlines. It is in the right place at the right time.
• NICE-Systems Ltd. (NICE) of Israel is a leader in digital security with cameras for ports, cities, railroads and airports. It is winning contracts worldwide and continues to grow due to the reality of increased terrorist threat levels.
Because technology stocks can be volatile, owning a diverse mix of several stocks or a tech mutual fund is usually the best bet.
Andrew Leckey answers questions only through the column. Address inquiries to Andrew Leckey, 555 N. Central Ave., Suite 302, Phoenix, Ariz. 85004-1248, or by e-mail at email@example.com.