This year hasn’t been a strong year for tech stocks. Many tech companies are sitting at extremely low valuations. We’ll look at five to see which of these tech stocks should be in your 2012 portfolio:
Sirius XM Radio Inc. (SIRI)
Sirius XM Radio provides subscription satellite radio services in the United States and Canada. After a decade of losing money, Sirius XM finally became profitable in 2010 by earning $0.01 per share. Earnings have continued to grow through the first half of 2011, earning $0.01 per share in the first quarter and $0.03 in the second. Revenues have been growing on average 63.4% over the last five years. This growth is somewhat priced in, as shares are trading at 28.2 times forward earnings. However, if earnings keep growing like they have been, profits will soar for this scalable business.
Competition will be stiff as always from earthbound radio broadcasters. Cumulus Media Inc. (CMLS), Westwood One Inc. (WWON), privately held Clear Channel and others all offer similar entertainment services for free. Sirius Radio has to gain new customers and keep them to maintain growth. Right now, Sirius is able to keep about 46% of the customers they sign up. Pandora, Inc. (P) is using a similar strategy of equipping new cars with Pandora Radio. Watch out for Pandora encroaching on potential Sirius customers. However, if there ever has been a time to buy Sirius, it’s now. The company has been a perennial loser with great potential, and now it is finally reaching scale. It’s worth owning for 2012.
Intel Corporation (INTC)
Intel is the world’s largest maker of semiconductor chips. After a record year in 2010, investors have been giving Intel the cold shoulder in 2011. Shares currently trade at 8.23 times forward earnings -- that’s almost as cheap as Bank of America (BAC)! The difference is Intel isn’t facing litigation and defaulting homeowners; Intel has $11.5 billion in cash and can cover its interest 1,296 times.
So why is Intel so cheap? The answer is that it's probably undervalued. Return on assets for Intel is 19.8, when the industry average is 3.4, and chief competitor Advanced Micro Devices (AMD) only manages 9.7. Intel is also 25 times bigger than AMD. Net profit margin is 25.3% and has averaged over 18.2% for the last five years.
Earnings per share have been growing 7.5% a year for the last five in an industry that has averaged declining growth rates. Plus, Intel offers a 4.3% dividend, which is rare for a tech stock. The main fear about Intel is the recent rumor that Apple (AAPL) might dump them as a supplier. Apple is not happy with the power consumption of Intel’s current chip line -- news which obviously woke up Intel. The company has since put together a roadmap for better power efficiency. While losing Apple as a buyer is a risk, Intel’s valuation is pretty good right now, making it worth considering for the value investor’s 2012 tech portfolio.
Juniper Networks, Inc. (JNPR)
Juniper Networks is a leader in high-performance networking. Coming off a bad earnings report, Juniper Networks’ stock has faltered. In addition to the earnings miss, Juniper Networks lowered expectations for the future. Has this presented value investors with an opportunity, or should we stay away? The first problem is Juniper builds networking infrastructure.
This is the industry Cisco (CSCO) operates in. The reason that’s bad is because networking technology is so good these days it has become a commodity. It is hard to maintain profit margins and competitive advantages in a commodity market. Return on equity for Juniper Networks has been 2.0% over the last five years. Net profit margins have averaged 3.8% over the same time period. This does not indicate any sort of competitive advantage. Stay away.
Advanced Micro Devices, Inc. (AMD)
Like Intel, Advanced Micro Devices makes computer chips. Currently trading for less than six times earnings, AMD is more beaten down than Intel. Investors are worrying about tablets squeezing out the demand for the traditional PC. The market for computer chips continues to get more competitive. ARM Holdings PLC (ARMH), mainly a chipmaker for mobile devices, has announced it will move into the PC chip market as well. The other knock on AMD is that it is clearly number two behind Intel. Net profit margins are not nearly as strong as Intel’s, 7.7% versus 25.3%. The company offers no dividend and is highly leveraged.
AMD did quell some uncertainty by announcing a new CEO, former Lenovo COO Rory Read. New product offerings for lower power processors known as “accelerated processing units” or APUs could be promising. An interesting note: Power consumption is one of Apple’s complaints about Intel chips; the bad news is rumors about Apple dumping Intel for another chipmaker don’t mention AMD. Instead, ARMH is on the good side of the rumor. Unless AMD is able to create a new competitive advantage, growth prospects don’t look promising.
Dell, Inc. (DELL)
Dell makes computers, and lots of them: The company operates on scale. Net profit margins have averaged 4.1% over the last five years, yet Dell has managed a five-year return on equity of over 50%. This is a pretty well-managed company that competes well in the low-cost computer environment. The problem is Dell is no longer facing explosive growth -- it is fighting to remain competitive in a rapidly commoditizing computer market. Competitor Hewlett-Packard (HPQ) is interested in leaving the PC market because margins aren’t what they used to be. Services offerings have propelled IBM (IBM) into startup-like growth, not computer hardware. Dell doesn’t offer a dividend, and the market for PCs doesn’t offer the growth prospects to make Dell a worthwhile investment for value investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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