2 Tech Stocks to Buy After Recent Underperformance

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

Significant outperformance or underperformance with respect to the broader markets is often a sign that something interesting is happening in a company. Analyzing fundamentals of such a company is often the first step in identifying potential investment targets. I screened technology stocks which have significantly underperformed the broader markets in the last one month and the following two stocks looks attractive after recent correction. 


NetApp has declined ~15% in the last one month and is trading currently around $28. Given net cash of $4.2 billion on its balance sheet which is almost equal to $12/share, I think this is the correct entry point for investors. There seems to be no reason to undermine the business capabilities of the companies which still have a lot of potential to drive the stock price upwards in longer term.

I see NetApp sitting over 2 BIG opportunities, which can give a boost to its revenue streams:

1. Growing NAS demand: Considering the enormous growth in unstructured data, as byproduct it will also create a demand for file based NAS. The catch here is the existing replacement product for NAS is SAN, which is doubly expensive than NAS. Considering the current squeeze in IT spending, I expect an increase in NAS sales through NetApp. With that said, I am not undermining the capabilities of its competitor EMC Corporation which would definitely like to cash in on this opportunity but NetApp, being an early starter with its ONTAP OS/WAFL system built for NAS, definitely has the advantage.

2. CDMI: With a feature called Cloud Data Management Interface (CDMI) in its StorageGRID software, NetApp breaks the dependency on vendors. Most storage vendors have exclusive interfaces to interact with cloud storage but with the introduction of CDMI which is more open, this dependency will be removed and will make vendor switching easier. NetApp is one of the storage vendors that provide this standard and this will drive sales in time to come. 

Other than this, NetApp teamed with Desktone to provide storage infrastructure/software support to enterprise ready desktops of Desktone. Desktone is a desktop-as-a-service provider (DaaS) built for cloud delivery environments. Seeing PC growth declining and companies looking to reduce hardware costs, I see further growth opportunity for NetApp.

Red Hat (NYSE: RHT)

RedHat’s stock price has declined ~8% in the last one month. In spite of the tough macroeconomic environment and currency headwinds, Red Hat posted strong 2Q13 results. I believe FY13 will be the transition year for Red Hat, with cloud infrastructure, Big data, PaaS and virtualization offering long term opportunities. Correspondingly, I see a lot of potential revenues coming from RHEL/JBoss since they both still are in the growing stage.

As companies look forward to invest heavily in data centers and cloud computing, I see Red Hat strategically placed to cash this opportunity with its strong platform. To give an idea on the possibilities, 15/30 deals were led by JBoss. The consulting services revenue on the other side is expected to see an upside stream when RHEL7 certification comes out next year. Notable, that cross-selling into RHEL clientele is the driving factor behind large middleware contracts. These contracts typically have longer sales cycles with larger income opportunities. 

RHEL is the preferred O/S for private cloud deployments (U.S. Department of the Interior and DreamWorks) as well as public clouds.  RHEL is also gaining traction from the explosive growth in SaaS & IaaS (including Salesforce.com and Amazon).

One more thing, on which I am placing my confidence, is Red Hat Storage (formerly known as Gluster). Red Hat acquired Gluster in Oct11 and its products are all set to be launched in 3Q12. It will provide inexpensive software based storage for storing large quantities of data which are not frequently visited. With current customers like Pandora and Brightcove, I see it adding more clients seeing the massive storage requirement of the content driven companies.

Keeping in mind Red Hat’s intact growth trends and its cash rich balance sheet (2Q12 ended with $1.36 billion with no debt), I think it’s a good buy. Also, with several new products scheduled for launch we can expect the company's billings to re-accelerate.

ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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