Why These 3 Tech Companies Are a Good Investment Opportunity
Damian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Although plenty of Tech companies offer great growth prospects and market out-performance, the last ten years have taught me to invest more wisely. Instead of looking for humongous growth, I search for companies that offer sustainable -and attainable- expected growth rates, plenty of cash to back its development and an economic “moat” to keep competitors at bay. EMC (NYSE: EMC), Check Point Software Technologies (NASDAQ: CHKP) and SalesForce.com (NYSE: CRM) are three companies that satisfy these criteria; so, let’s try and elucidate which ones are good investment opportunities at their current valuations.
EMC's storage and security solutions and services fit at every level of a company's IT infrastructure. Mainly focused on providing infrastructure and security for Cloud Computing and Big Data, this industry leader holds about 30% of the market share. EMC seems especially positioned to benefit from the expanding demand for Cloud Storage and Big Data Solutions, which are expected to drive growth in upcoming years. This trend should be boosted by the increasing use of smartphones and tablets, whose limited processing capability and storage space should continue to create the need for cloud storage solutions. As a result, analysts expect an annual growth rate around 13% over the next five years, a figure that, although under the industry average, looks pretty good (and attainable).
As stated above, EMC counts with two particular advantages over most of its peers: a considerable moat –mainly in account of high switching costs for its clients and a scale that is not easy to match- that helps keep competitors lagged and its massive cash flows and war chest: over $5 billion in free cash flow and around $11 billion in cash and equivalents. This has and will continue to allow the company not only to invest in new products and strategic acquisitions, but also to return value to shareholders through stock repurchases and dividends.
Going forward, acquisitions and alliances will also play an important role for EMC’s development. In the last few years, the VMware purchase in 2004 and alliances with Lenovo, Cisco, Intel, Microsoft and Oracle, amongst many others, have proven very profitable for the firm and should continue to do so.
Although it trades above the industry average, I believe thatEMC is still undervalued and constitutes a profitable long-term investment. I’d say, buy; with a strong cash position, plenty of growth prospects and a fair moating, this company looks safe enough to put our money down.
Check Point Software Technologies: Computer servicing & manteinance
Check Point Software Technologies provides companies with innovative software to protect their computers and enhance their performance. It offers a range of products that comprises firewalls, endpoint and data protection, amongst others. The firm charges an annual fee to keep its clients’ software updated and functional. This service has not only differentiated the company from many of its peers, but has also provided a steady source of revenue. These two elements have kept the company moated and profitable, and will most likely continue to do so in the years to come.
In addition, several elements could drive growth in the long-term. For starters, cyber-security is becoming more and more relevanct for companies, providing strong tailwinds for Check Point. Moreover, its software appliances centralize all of the security functions in one console; this makes them user-friendly and generates considerably client stickiness.
The company is expected to deliver an average annual EPS growth rate of around 11%, a target that seems easily reachable, since the company holds not only a strong brand name, but also plenty of cash to support its expansion plans. With almost $900 million in free cash flow and zero long-term debt, its balance sheet looks quite strong. Consequently, acquisitions will play an important role in the years to come, as evidenced by the the purchases of Protect and Nokia´s security appliance business.
Trading at 16.9 times earnings, less than half the industry average valuation -- while offering industry leading margins and wide returns -- Check Point´s shares look like a buy and hold case for me.
SalesForce.com provides on-demand business services, mainly focused on Customer Relation Management (CRM) software that helps companies easily manage various critical business operations. “By building its application on the public cloud, the company drives down costs by supporting a common hardware, networking and software platform, and passing some of that savings along to customers” (Morningstar).
As the industry leader, the company holds a strong brand name and a fair moating that has helped keep giant competitors like Oracle, SAP, and Microsoft lagged, and will most likely continue to do so. Furthermore, deriving most of its revenue from subscription fees, it holds a steady and predictable source of income and generator of free cash flow that will support future expansion initiatives.
By being the first mover in the Software-as-a-Service (SaaS) segment, it has procured many large customer accounts, which, coupled with continuous innovation and expansion, has resulted in an average annual revenue growth rate of almost 50% over the last 8 years. Going forward, Salesforce.com’s features will not only help it retain existing clients, but also attract new ones looking to cut-down on IT expenses. Further growth opportunities are provided by the firm’s continuous product innovation, high cross-selling capabilities, acquisitions (as evidenced by the Rypple purchase last year) and international expansion.
The recent acquisition of ExactTarget has resulted in a substantial decrease in the firm’s stock price (but it will most likely not last long.) Although still valued more expensive than many of its peers, the current valuation opens an attractive entry point for investors. I’d say buy now and hold on to your shares: Analysts expect the firm to deliver an average annual EPS growth rate of about 28% over the next five years, surpassing the industry average by over 75%.
For a fundamental investor like me, a company that can keep competitors lagged while retaining its clients, and holds plenty of cash for expansion expenses, is quite certainly attractive. Above I have briefly looked into three companies that hold such features, and you should consider adding to your long-term portfolio.
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Damian Illia has no position in any stocks mentioned. The Motley Fool recommends Check Point Software Technologies and Salesforce.com. The Motley Fool owns shares of Check Point Software Technologies and EMC. 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!