3 Tech Stocks Soaring 15% Over Target Prices

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

When a stock is trading well-above a 1-year target price, investors need to be extra cautious. Analysts can carry great weight in influencing the share price movement of companies. Large discrepancies between trading price and target price signal one of two things: either the market is too bullish on the company or analysts were too negative on it.

Three technology stocks that have a price gap from their target prices of 20% or more are listed below:

Table 1:

<table> <tbody> <tr> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>Gap %</strong></p> </td> <td> <p><strong># Analysts</strong></p> </td> <td> <p><strong>1 Yr Target  ($)</strong></p> </td> </tr> <tr> <td> <p>Netflix, Inc.</p> </td> <td> <p>45%</p> </td> <td> <p>24</p> </td> <td> <p>124.80</p> </td> </tr> <tr> <td> <p>Hewlett-Packard Co.</p> </td> <td> <p>47%</p> </td> <td> <p>15</p> </td> <td> <p>13.16</p> </td> </tr> <tr> <td> <p>First Solar, Inc.</p> </td> <td> <p>16%</p> </td> <td> <p>14</p> </td> <td> <p>27.41</p> </td> </tr> </tbody> </table>

Data Source: Bloomberg; Gap as at February 26 2013

These companies are either under-appreciated by analysts, or Mr. Market is assigning too much froth for them.

Which is it?

Analysis

1) Netflix (NASDAQ: NFLX) shares soared after trading in a $60-range from between August 2012 and late-November. The company traded at around a 52-week high, 34% above the target price of $124.80 recently. Shares were previously weighed down on concern that content costs would not be made up by rising subscriptions and profits. JPMorgan upped its target from $180 to $206 on February 13 2013, rating the company an “overweight.”

Netflix offered House of Cards exclusively to viewers. Consumers behave differently when all episodes are available at once: they tend to watch several of them at a time. This could make it a challenge for Netflix to sustain viewers over the long run without continually adding more and more content. Adding premium content has a cost for Netflix. During a quarterly earnings conference call with Disney, Bob Iger, its CEO, said that a movie deal with Netflix would be a “movie play” that would not hurt Disney Channel.

Momentum favors Netflix. Analysts could raise their target for the company as they recognize that renewed growth in subscriptions will support its business model.

2) Investors warmed up to Hewlett-Packard (NYSE: HPQ) again largely because the market was adjusting for undervaluation in other companies. HP is 22% above the 1-year analyst target price. Case in point: a buy-out in Dell raised speculation that HP could sell off its PC and printer unit. It is very unlikely that HP will make such a move, since the unit is worth more being part of HP than being spun-off from the parent.

Nothing fundamental changed for HP. The company still lacks any mobile or smartphone strategy that would excite investors. HP already abandoned both strategies when it took massive write-downs for the Palm unit. HP sold webOS on February 25 to LG, who will use it in smart TVs.

Mr. Market is too enthusiastic about HP, even though shares are deeply undervalued. A lack of any spinoff news for HP as Dell goes private could limit upside in HP shares in the short-term. Still, HP’s turnaround is on a multi-year time table. This strategy is centered on growing enterprise software sales. Growth through mobile device sales is secondary, if at all possible.

3) First Solar (NASDAQ: FSLR) shares are 20% above consensus targets. Investors are deeply enthusiastic about the solar energy sector as a whole. Securitization of solar panel leases will make cash flow more predictable, and will benefit panel makers like SunPower and MEMC. Survival of competitors is almost assured, should this financing take place. First Solar is one of the more stable plays in the solar sector.

First Solar could pull back if bullishness for the speculative solar energy plays fades. If that happens, the company could trade down, closer to the lower analyst target price. At that level, investing in First Solar is much more attractive.

Conclusion

The market is clearly assigning too much froth in Netflix, but this does not mean that shares are over-valued.  Analysts misplaced the importance of streaming media and the role it will play in growing subscriptions. HP is under-appreciated by analysts, and its earnings beat illustrated how much the market was caught off-guard. HP will continue to be under-appreciated until it demonstrates sustainable growth. This is not expected until 2014 at the earliest. First Solar is a market favorite, which means investors should watch this company for now. A lack of new deals, that ensure more sales for the next few years, limits upside in shares of First Solar.


chrispycrunch has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. 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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