2 Tech Stocks That Have Not Received Enough Favorable Press

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

Tech investors can be very fickle. This may be the nature of a fast-moving sector, and it illustrates the myopic outlook of the market. The glory of one company all too often overshadows the slow rise of another strong company. Investors are encouraged to see more than what "glitters" and buy the stocks that are slowly but surely forming a strong foundation. At the same time, make sure that, if that foundation doesn't work out as planned, you have a nice margin of safety from the existing streams of business. Below, I focus on 2 stocks that I believe have not received enough favorable press.

Why You Should Buy Microsoft (NASDAQ: MSFT)

During the past 3 months, Microsoft has slid around 10% in value and now trades at an extremely compelling price. The catalyst for much of the decline was poor Surface sales, which MKM Partners now expects to amount to just 3.3 million units by the end of fiscal year of 2013. In my view, this sell off was incredibly overblown, especially in light of how cheap Microsoft already was. Behind the headlines of disappointing Surface sales, there were several positive news: (1) Windows notebook sales fell only 10% y-o-y on Black Friday compared to a forecasted decline of 24% y-o-y, (2) Office 2013 is launching with a new touch-friendly user interface and an emphasis on subscriptions, (3) the software piracy environment in China may get hit after a Chinese site was ordered to pay $5.8 million, (4) downloads of Windows Phone apps have more than doubled following the launch of Windows 8, and (5) a partnership between Windows Phone and China Unicom.

At current prices, Microsoft is a steal. It trades at only 8.2x forward earnings and provides a 3.5% yield with forecasts for 9.8% annual EPS growth over the next 5 years. That means that, should multiples not expand, the minimum annual average return is 13.3%. But, I find the company will eventually see multiples expand to around 15x. Assuming Microsoft meets expectations, 2016 EPS will come out to $4.29. At a multiple of 15x, this translates to a future stock value of $64.35--more than double the current price. While you may disagree with that multiple, it is hard to slice the numbers in a way that suggests the stock will underperform.

And while analysts have gotten more pessimistic on the company, they are still bullish. 24 of 35 reporting analysts rate the stock a "buy" or better--14 of which say "strong buy." No analyst puts the stock at a "sell." With a return on invested capital of 23.4% (653 bps higher than the industry average) and a price-to-book ratio of 3.3x (versus the 4.8x industry average), this company is substantially under-appreciated. Moreover, the balance sheet is clean with lower total debt to capital and long-term debt to equity ratios than the industry average. $29.1 billion in free cash flow was generated for the TTM ending 3Q12, which represents 13% of the market capitalization. I recommend buying from a market correction.

Why You Should Buy Google (NASDAQ: GOOG)

Google is another tech company that is worth buying. This search engine business trades at a respective 21.9x and 15.1x past and forward earnings. Despite controlling nearly all of the market, it has continued to eat up Yahoo's (NASDAQ: YHOO) market share. No matter, Mr. Irrational Market has increased Yahoo's value 26.1% over the past three months while decreasing Google's value by 3.1%. While the management change-up in Yahoo was certainly needed, I am not sure it was that big of a catalyst in light of the eroding fundamentals.

Yahoo now trades at 14.6x free cash flow versus 17.7x free cash flow for Google--not enough of a value discount, in my view, considering that the company has few growth opportunities. When you consider what Google has under its belt--Gmail, YouTube, Android, Google search, etc.--it is odd that shares continue to remain this low. In an investment note, Goldman Sachs has rightfully noted that Android has failed to leverage its dominant share in the smartphone market, as evidenced by how 60% of mobile Web traffic comes from Apple's (NASDAQ: AAPL) iOS. Worse yet, mobile could be cannibalizing the PC ad business, which price ads at roughly double the rate on mobile. But the reason behind Apple's dominant share in mobile Web traffic is explained by the iPad, and that market is about to change in Google's favor.

Android tablets are forecasted to account for 42.7% of tablet shipments in 2012 at 65.8 million--easily within breathing room of Apple's 53.8% share. Better yet, Apple's share is down 620 bps, and it has come more from Android than the plethora of other competitors. So, put differently, we should expect a new stream of mobile traffic coming through Android that will catalyze shareholder value. The implementation of an ad-supported YouTube app for iPad is, ironic, because it helps to only add to Google's improving competitive position.

In the meanwhile, Yahoo will be focused on small acquisitions. The recent purchase of OntheAir, which enables group video chats, takes direct aim at Google+ hangouts, but it isn't really a threat, since it lacks a viable connection to a current network. It was easy for Google to launch its social network and Hangout feature, since it had the world's largest networks of search engine users and email users to leverage. It is thus a mystery that Yahoo's shares have taken off so much relative to Google's when it is the latter, not the former, that has delivered a string of promising results.


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