It's the next bold move in investing. For months, people have been creeping cautiously out of cash and back into the stock market. But now, according to many experts, is the time to jump into the sector that carries the most baggage: technology. Yes, many of the people who owned tech stocks when the Internet bubble burst in 2000 are still holding a grudge. But for those who can let financial bygones be bygones, the tech sector appears to have a lot to like lately. The demand for more useful gadgets, more powerful computers and faster Internet connections continues to grow worldwide. The top firms have little, if any, debt. And many of the stocks themselves are trading at reasonable valuations, less than half their average 10-year price/earnings ratio. "The sector isn't the rocket ship it was in the bubble days, but it's still an exciting place to be," says Telis Bertsekas, manager of the MFS Technology fund.
Besides the general march of technology, many experts believe several mini-trends will bolster the tech sector. Microsoft unveiled a new iteration of its Windows operating system this fall, a move that usually persuades individuals and businesses to upgrade, not only replacing their computer software but also the computer itself. Of course, the more computers are sold, the better business is for makers of microchips, flat-panel monitors and other components. Meanwhile, cable and telecom companies will be spending billions next year upgrading their networks as they move to offer even more video, audio and Internet services-which is on top of the $7 billion the government pledged in the stimulus package earlier this year to build out broadband service. That means more sales for network hardware companies, such as Cisco Systems, and chipmakers. Since September, there has also been a jump in merger activity, filings for initial public offerings and venture capital floating into tech-all moves that are usually promising for a sector's stock prices.
Investments in tech are hardly without risk, of course. The sector is tied to business and consumer confidence, and a weaker-than-expected recovery could mean both consumers and businesses will continue their cautious spending year. In recent months the tech sector has rallied stronger than the overall market on hopes for an improving economy. Tech stocks are up 76 percent since the market's March lows, compared with 64 percent for the Standard & Poor's 500. Yet many managers believe the sector has a ways to go. "The sector has done well, but it's still reasonably valued," says Bob Barringer, comanager of the FBR Pegasus fund, which owns Intel and Microsoft. We focused on five firms that some pros think will benefit during the recovery and well beyond.
Over the past few years, companies had several legitimate excuses to put off buying new computers. But those excuses are starting to ring hollow, and analysts expect companies worldwide will begin purchasing computer hardware en masse. Analysts say that looks like good news for one particular hardware company: Intel.
Intel is the world's largest producer of semiconductors-the brains of any computer or tech device. Its fortunes rely mostly on the market for run-of-the-mill PCs. Intel has an 80 percent share of the chips in PCs, and when corporations curtailed their spending on new machines last year, Intel shares stagnated. But now Microsoft has issued a new operating system, its first since 2007, and 80 percent of corporations intend to upgrade to it by 2011, according to a survey by ISI, an investment adviser. Analysts also expect many companies to buy new computers to run it. The recession put sales of computer hardware-and Intel chips-on hold too. But there are signs that suggest people and companies are spending on technology again. Sales of semiconductors, which had fallen off a cliff last year, have been rising steadily since the summer.
The Santa Clara, Calif.-based firm isn't betting all its chips on standard PCs or Microsoft's upgrade cycle, either. The company has more than a 90 percent share of chips that go into netbooks-cheap laptop computers whose sales are growing rapidly. And earlier this year, it jumped into the smartphone market with the $884 million acquisition of Wind River Systems, an embedded-software company. "Recessions are great opportunities to differentiate yourself from the competition," Stacy Smith, Intel's chief financial officer, tells SmartMoney. In the meantime, investors can pocket the 2.8 percent dividend.
If you use the Internet, you probably use Google's famously Spartan home page to search for topics in cyberspace. The company boasts a 65 percent share of the U.S. online-search market and a 67 percent share globally. Despite the bad economy, Google boosted its revenue 7 percent in the third quarter of 2009 compared with the same time last year.
But in the eyes of some analysts, the most remarkable thing about the Mountain View, Calif.-based company is that it still has plenty of room to grow. "Search continues to be a juggernaut, but it's not like it's mature," says Ryan Jacob, manager of the Jacob Internet fund. Google should continue to rake in profits if it can keep its grip on the ad market for a few more years. Online advertising accounts for 12 percent of the $267 billion ad market. By 2014, online ads could account for more than 20 percent of the ad market, according to research firm Forrester Research. And analysts believe that advertisers will likely pay Google more for online ads when the economy improves.
Yet since search eventually will mature, investors are also looking for Google's other ventures to make money. That includes Google Apps, its collection of Web-based programs and file storage, but most analysts are looking at YouTube, Google's amusing but profit-impaired video site. The company has been testing pop-up ads at the bottom of the video screen and even so-called interstitial ads that come up between video clips. "YouTube clearly has some of the biggest potential of any Google property," Jacob says.
While it's not very cheap, Google's stock is inexpensive by its own sky-high standards, trading at less than half its average five-year valuation of 48 times earnings. The firm is secure financially, with more than $20 billion in cash and short-term securities and no debt.
Led by Larry Ellison, business-software firm Oracle has snapped up onetime giants PeopleSoft, Siebel Systems and BEA Systems, along with dozens of smaller players. To top it all off, the Redwood Shores, Calif.-based company has agreed to acquire computer maker Sun Microsystems for $7.4 billion. Although some question whether Oracle is finally biting off more than it can chew, the buying spree has paid off so far: The company reported a record operating margin of 51 percent in its fiscal fourth quarter (which ended May 31), despite the recession, and profits have remained high since.
Oracle's earnings have held up relatively well, thanks in large part to the company's maintenance fees for its software programs. It helps, of course, that firms need software to run databases and meet payroll in both good times and bad. Oracle's acquisitions in recent years have allowed it to capture a larger share of firms' tech budgets, transforming the company "from just another vendor to a strategic partner with customers," says Andy Miedler, an Edward Jones analyst.
While a takeover of Sun Microsystems would give Oracle a substantial hardware boost, as well as control of Sun's Java programming language, concerns about the acquisition seem to be weighing on Oracle's shares. Some analysts say Oracle agreed to too high a price for Sun and that it takes it too far afield from its core software business. Oracle also could face another challenge from the growing field of "cloud computing," online applications that aren't tethered to a particular machine, some analysts say. Oracle declined to comment.
The company's fans say that it isn't likely to lose its competitive advantage any time soon, and that its stock is attractively valued at 15 times next year's projected earnings. Throw in the company's modest quarterly dividend-currently yielding about 1 percent-and you have a tech giant worth betting on. "The valuation's cheap, they're a leader, and their market will have growth for a while to come," says FBR's Barringer, who owns the shares in his fund.
Video games are in a slump. Since the market crash, sales of games are down sharply in the U.S., and the makers of game consoles-Sony, Nintendo and Microsoft-have cut the prices on their machines to spur sales. Activision Blizzard, the No. 2 gamemaker by sales, hasn't been immune; its sales are down from when it was two separate companies (Activision merged with Vivendi's interactive entertainment business, Blizzard, in July 2008). Yet thanks to a slew of popular game franchises-Guitar Hero, World of Warcraft and Call of Duty among them-the company has fared better than its rivals, gaining market share around the world. And some analysts say the company's slate of holiday games is so good that even those hesitant to spend on games will pick some up.
Analysts say the Santa Monica, Calif.-based company has fared better in the recession, thanks to its subscription game business, which makes up about one-third of its $3.5 billion in sales. The company is the leader, by far, in massively multiplayer online role-playing games (also known as MMORPGs), getting gamers to pay about $15 a month for the rights to play open-ended games online. Jeetil Patel, senior analyst with Deutsche Bank, says Activision Blizzard should pick up more subscribers in China since it's switching its game distributor there.
Despite the slump in sales, Activision Blizzard's shares are up more than 30 percent this year, besting its two major rivals over the past 12 months. Analysts attribute that to the company's market-share gains during the recession.
Corning finds itself in the opposite situation from Activision Blizzard. Sales of video games, Activision Blizzard's top product, have fallen, but its stock is up considerably. Meanwhile, sales of flat-panel televisions, which Corning makes the glass for, have held up during the recession, yet Corning's stock has barely moved. In the eyes of some analysts (and even Corning's own chief financial officer, James Flaws), many investors have ignored Corning's sales to focus on the uncertainties surrounding the liquid-crystal display (LCD) digital-television market. Corning has been the beneficiary of television manufacturers cutting prices to move TV sets. But those steep discounts will be less plentiful this holiday season, says Paul Gagnon, director of North American TV research for DisplaySearch, a market-research firm. Analysts worry that a big drop-off in TV sales could leave Corning with a lot fewer orders for glass. Flaws tells SmartMoney that Corning has had inventory struggles in the past but that isn't the case now. Meanwhile, the outlook for LCD TVs remains strong; only 17 percent of the world's 2 billion TVs are LCDs. U.S. consumers could soon have no choice but to opt for svelte sets, since retailers could phase out cathode ray tube televisions (the type of set you grew up watching) completely by next year.
Glass sales account for about half of the $5.9 billion in annual sales, but the Corning, N.Y.-based firm has its hand in many other businesses. Fiber-optic wire, often used to enable broadband Internet service, accounts for 12 percent of the company's sales. The number of broadband subscribers worldwide is expected to more than double, to 1.7 billion households by 2012, according to Ovum Group, a technology-research firm. To reach that goal, carriers will need to lay down a lot more wire.
Perhaps best of all, Corning's shares look pretty cheap to some pros. At just 11 times next year's expected earnings, Corning's valuation "accounts for a significant amount of disappointment," says Chris Armbruster, senior research analyst at Al Frank Asset Management, which added more Corning shares recently.
Trackback URL for this story: http://www.smartmoney.com/tb/Jdmt.2FNQ.3D
What is a Trackback?It is a way to tell us that you have published something that references this story.
How do I send a Trackback? If you blog or mention this story on your website, you can use this Trackback URL to notify us about it. Some blogging software programs can help in sending a Trackback to us.
Click here to read more about Trackbacks.
Why Tech Looks Tempting: While a takeover of Sun Microsystems would give Oracle a substantial hardware boost, a.. http://bit.ly/5dOwLF
Why Tech Looks Tempting http://bit.ly/7z53z0
Why Tech Looks Tempting http://bit.ly/6rsxTt
Why Tech Looks Tempting http://bit.ly/4KNLB5
Why Tech Looks Tempting: ... a move that usually persuades individuals and businesses to upgrade, not only repl.. http://bit.ly/5dOwLF
Read Full Article »