3 Tech Behemoths to Consider
Damian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Giants don’t take baby steps, and are certainly hard to knock down. Google (NASDAQ: GOOG), Qualcomm (NASDAQ: QCOM) and Broadcom (NASDAQ: BRCM) are three established tech companies that have been outperforming their peers. With promising paths to profits ahead of them, they are interesting options for those looking for long-term investments in the sector. Let’s take a closer look at each.
A leader to look out for
Google is one of the leading tech enterprises and is the undisputed champ in Internet searches, with more than 60% of the global market share. This is an impressive figure when you take into account that no other competitor reaches 10%. Having gained around 28% during 2013, Google trades at $895, or 26 times its earnings--this represents an 11% discount to the industry average.
Google’s second quarter results, reported last week, failed to meet Wall Street’s estimates. Falling ad prices and Motorola’s widening losses were to blame. The cost per click (CPC) of advertisements, which is a key metric for the company, experienced a year-over-year decline of 6%; this certainly had an impact on the company’s revenues, as the firm’s core source of revenue is online search advertising.
This shouldn’t scare investors, however; Google still offers solid growth prospects. As Internet ad spending is expected to increase, the company should offset any CPC issues with increased volume. Investors should be aware that the web search advertising market continues to retrieve double-digit growth, and so far the competition has been unable to threaten Google’s dominant position in the market. I remain reluctant to claims that Facebook’s new Graph Search may pose a threat to Google’s market share in the search business, although the firm is indeed a competitor for display ads. Overall, I'd recommend adding this stock to your long-term portfolio.
Licensed to communicate
Qualcomm is a major player in the digital wireless telecommunications market. Its business is primarily focused on selling wireless chips and licensing technology. The company’s developments in CDMA technology (which all 3G wireless networks use) constitute the foundation of its wide economic moat, as handset makers must pay royalties to the firm in order to make their devices function on a CDMA network.
The substantial growth of 3G wireless technologies in emerging markets such as China has been consistently benefiting Qualcomm’s royalty revenues. This tendency is not expected to revert, either. In fact, according to Wireless Intelligence reports, over 1.5 billion 3G users should be added in these regions by 2015. Moreover, the demand for high-end smartphones and tablets is gradually increasing, which should benefit the company over time. The biggest risk regarding its licensing revenue is that it’s tied to handset pricing: if these fall, so will Qualcomm’s revenues.
Qualcomm trades at $61 or 17 times its earnings, an almost 50% discount to the industry average. It also offers a 1.79% yield and industry-leading net and operating margins. The company is in a position to benefit over time. Despite the fact that its shares don't appear poised to offer above-market gains soon, it looks like an interesting long-time investment.
No fish but lots of chips
Broadcom is an American semiconductor provider. The company has experienced sustained growth since its establishment, fueled primarily by the broadband communications burst. The firm’s main strength has been innovation; with its broad product portfolio, Broadcom is now the market leader in supplying chips for some of today’s most popular technologies including mobile connectivity, set-top-boxes and media servers, and enterprise networking.
The company’s revenue has been growing continuously over the past 10 years at a compound annual growth rate (CAGR) of 22%, which is way over the industry average of 8%. The persistent growth of the wired and wireless communications markets, where Broadcom is a key supplier of connectivity chips, offers solid growth prospects for the firm. The increasing demand for smartphones and tablets in particular should drive Broadcom’s growth.
Besides having major firms such as Apple and Samsung as its customers, Broadcom has been forming partnerships with handset makers in emerging markets. In China, the world’s largest smartphone market, Broadcom is working with China Unicom to introduce a smartphone priced below $100.
While there are encouraging long-term revenue opportunities for Broadcom, the company must invest heavily in R&D if it wants to maintain its competitive technology edge. This is due to the company facing increasingly fierce competition in the wireless market.
Currently, Broadcom trades at 33$ or almost 24 times its earnings, representing a slight premium in comparison to the industry average. With a strong performance record and a growing customer base, however, it looks like good time to chip in.
While the three stocks reviewed offer tempting prospects, my bet here is with Broadcom. The firm has been performing strongly, has demonstrated notable technological proficiency, and is expected to continue to benefit from the strong demand for mobile devices and smartphones. In this aspect, the partnership with China Unicorn certainly sounds promising as it answers this demand in the large Chinese market.
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Damian Illia has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook, Google, and Qualcomm. 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!