3 Techs You Should Watch on Thursday!

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Technology is one of the most volatile sectors in the market, and can quickly return some of the largest gains. In this piece, I am looking at three different tech companies that are responding to strong quarterly performances, and trying to determine if any are a “buy”!

Low expectations produce quarterly beat

After losing almost 15% of its value in 2013, shares of Red Hat (NYSE: RHT) traded higher by 3.5% in Wednesday’s afterhours sessions following its first quarter (Q1) earnings. The company beat on both the top and bottom line, as expectations have been lowered following Q4’s disappointment.

Considering Red Hat’s explosive growth over the last decade, the company’s 15% year-over-year revenue growth is not what I’d call enlightening for Red Hat investors. This has been a high-growth company for many years, but is now transitioning into a more stable growth company with low double-digit growth.

Red Hat is a company that operates in the cloud, with its billing indicating future performance. In this current quarter, billing rose 14% over last year, which is much better than the 9% we saw in Q4. Thus, it seems as though Red Hat’s valuation might have suffered due to temporary weakness, meaning the stock could see upside in the immediate future.

Nothing exciting from this quarter, but large gains were created

After seeing Infinera and Ciena trade considerably higher after earnings, during the last couple months, investors have been anxiously awaiting other communications/telecom equipment stocks to see how they perform after earnings. Such is the case with Finisar (NASDAQ: FNSR).

Currently, shares of Finisar are trading higher by 11% after reporting earnings on Wednesday; after the bell. In terms of performance, the company barely beat expectations, but issued guidance that was above the consensus.

The problem I have with Finisar is that it’s not producing significant revenue growth. The company is growing at just 2%, yet its operating expenditures (OPEX) are increasing 4% year-over-year. Therefore, I think the company is spending too much money to produce the strong demand for its 10/100G Ethernet components, and I wonder if its adoption into data centers would occur if not for the company’s spending. Thus, since it opened to double-digit gains on Thursday, it might be wise to take some profits.

Industry shift leads to large gains

After a 10% gain over the past three days – a 120% YTD gain – Micron Technology (NASDAQ: MU) is trading with losses of almost 2% following its Q1 beat. While the weak performance might not last, the current weakness looks to be nothing more than profit taking.

Micron posted a phenomenal quarter by all means. The company sells DRAM and NAND flash drives, and saw growth of 23% and 7%, respectively. As a result, free cash flow increased to $389 million from burning through cash in recent quarters.

The turnaround for Micron has been remarkable, as both DRAM and NAND prices increase. The company is playing this growth in the correct way, as it reinvests in capital expenditures (CAPEX) while also greatly improving gross margins (by 600 basis points over the prior quarter. Thus, I think Micron is an interesting story, and that it will rise again following this slight pullback.

Final thoughts

Personally, I am big fan of what Micron reported in its quarter. This is a company that saw large losses in 2011/2012 as prices declined, but because of a macro shift, the company is excelling and is making all the right decisions.

To me, Finisar is simply not growing fast enough, and while Red Hat’s quarter was impressive, I am not sure that it is sustainable. Therefore, Micron is the winner, and I think we will see further gains from the stock over the next few months. 

Brian Nichols has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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