Alternatives To Buying Apple

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

If you are looking to get into tech stocks, there are several factors that I think you should consider. First, make an educated guess about growth. Analysts can sometimes be way off the mark on this point. Since technology is able to trade at multiples by virtue of its natural innovation, sell-side analysts face considerable pressure from their firm's investment banking clients to be bullish on growth. Second, I encourage buying small cap stocks. These companies don't get nearly as much coverage from the Street, yet will have, on average, greater growth. Below, I review several companies--the most expensive one in the world and two <$300 million tech producers--with this in mind.

The Good & Bad About Apple (NASDAQ: AAPL)

For me, I have always been on the fence about Apple. While it's clear the company is led by top management that knows how to deliver, the question of whether it will outperform is hard to answer with meaningful certainty. First, it looks cheap at only 12.2x past earnings and a PEG ratio of 0.62x. Analysts forecast 19.6% annual EPS growth over the next 5 years, and this is complemented by a stellar 42.8% return on invested capital--double the sector average. But a series of misses have rightfully caused the market to review the outlook. Even though 46 of 54 reporting analysts are calling the stock a "buy" or better--20 of which say "strong buy"--there is a growing shift towards a more bearish outlook. This is reflected in 5 "holds" and 1 "sell," and 2013 EPS consensus dropping from $52.98 two months ago to $49.59 today.

So where do we stand now? Apple has several moving parts to look at. First, its tablet business is coming under pressure and, worse yet, becoming commoditized. Microsoft's Surface tablet may not be performing as expected, but it communicates to the market that Apple's offerings can be out-innovated. Estimates have fallen from Apple grabbing 60% of tablet shipments in 2012 to only 53.8% today. More disconcertingly, Google Android tablets are estimated to get 42.7% of shipments. Google was able to become the leading mobile OS provider, and it's on its way to taking over the lead in tablets. Android has captured three-fourths of smartphone shipments--quadruple Apple's share. But investors are still focused on Apple's past execution. Apple TV represents a significant catalyst, though it isn't clear how much this will offset rising competition against previous offerings.

Recent news is that trading firms are boosting their margin requirements on the half a trillion dollar tech firm. Yet iPhone lead times are declining, and the company is expanding its iTunes store into 56 more countries. This will create greater product awareness and may even reverse the bearish revisions of recent days. With a $757.77 consensus price target, Apple still has a lot to prove.

Small Cap Roundup: Silicon Graphics (NASDAQ: SGI) & Avid Technology (NASDAQ: AVID)

If you had invested $100,000 in Apple when it IPOd on the NASDAQ in late 1980 and held until today, you would have $122 million. Needless to say, Apple can't provide those returns today. But there are small cap alternatives that may provide substantial returns. Owning a basket of these stocks is ideal, since the main point is to get a hold of a high-growth portfolio.

Silicon Graphics and Avid Technology are two stocks worth looking at. The former is in the computer hardware business--providing products and services, such as computing servers and data assistance to technical, scientific, and business end markets. What I like about the company is that it is putting a considerable portion of its capital into R&D--8.4% of sales in FY2012--to accelerate its revenue base. Revenue has grown from $102.8 million in 2009 to $753 million last year--a CAGR of 94%. 

It is expected to break into profitable territory next year with EPS of $1.14. At only 7.4x this amount, the company looks meaningfully undervalued. Moreover, it is quite safe with a clean balance sheet and $3.24 per share, or 36.8% of the market assessment. Right now, the consensus price target is $14.67--a 65% premium to the prevailing price.

Avid trades at 25% below book value, lacks debt, and is forecasted for 15% annual EPS growth over the next 5 years. As a provider of products for creating digital media content, the company directly targets what I see as a rising consumerist culture (at least from the depression lows). In reaching out to this culture, industry creatives and film studios will look to leverage an increasing amount of mediums. Fortunately, Avid hit positive free cash flow territory (ttm) early this year and generated $50.6 million in the TTM ending 3Q12. Put differently, even if Avid doesn't grow any more from here, it still pays off the costs of purchasing its stock in less than 5 years and a half.


TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. 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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