Should You Buy These Tech Stocks?
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Tech can be very difficult to predict. Investors often believe that they can discern an innovator from a laggard, but market trends come and go – especially in the consumer niche category. Below, I review two very different companies: Seagate (NASDAQ: STX), a data-storage device producer, and Google (NASDAQ: GOOG), an internet business with broad tech diversification.
What a turn of events Seagate has had.
It all started early this year, Seagate reported fiscal second-quarter data. Revenue came out to $3.7 billion revenue with over 58 million products sold. Revenues were 14% higher than the same quarter last year, and gross margins held up at 27% despite the 20% increase in capital expenditures. The company’s dividends were also increased to $0.38 per share. It is this kind of momentum that has caused analysts to become more bullish despite the industry's supply and demand woes.
The main problem with Seagate has been that its top products are for PCs, and the market is predictably falling. Moreover, the largest competitor, Western Digital (NASDAQ: WDC), is continuing to cut into margins more and more.
In addition, Seagate is not doing enough to hedge against the downside by investing in new technologies. For example, Seagate's decision to allocate some $40 million in Virident Systems for the development of a PCIe-slot SSD (solid-state drive) does very little to migrate towards smartphone and tablet demand. That doesn't mean the product will be bad, however. Since hard drives use 3-6GB S-ATA as a transfer of data, SSD will use a direct connection to the motherboard and provide much higher transfer rates.
Seagate remains a very risky investment. It trades at around 4 times free cash flow, but the beta is sky high at 2.5, so the stock can tank or soar. And the dividend yield of 3.3% isn't much of a relief, since earnings are expected to erode by a rate of 3% per year. In light of the poor diversification into more sustainable business segments, I encourage avoiding the stock for now.
However, Western Digital, which has also doubled from the lows, is forecast for positive growth in the near term. At 8.2x past earnings and only a beta of 1.5, the risk is much less for very similar market exposure.
Why I'm a fan of this internet stock
By contrast, Google is doing a lot to innovate and increase upside. A video of the firm's Google Glass product showcases how focused the company is on actually executing its "pie-in-the-sky" ideas of Google X.
Some anticipate a 2014 launch. I may be dead wrong in my prediction, but I fully expect the product to be popular in the market among electronics fans. There are several reasons why I feel this way:
First, the product is actually good. It will allow users to open maps, read news, and access useful information. These new glasses are one of Google’s highly anticipated products. Second, by the time it is released, the cost of Google Glass will fall in the same range of a smartphone or tablet. It is particularly important for the product to hit this price point, so it is seen as a mass-consumer good the same way that the iPhone and iPad are seen.
Third, Google has already executed in tackling different markets. I would have said a few years back that it had no business being in mobile. As a search company and, perhaps, content aggregator, mobile was seemingly too "detached" from the core business. However, the company not only entered the market, but it also displaced the supposed invincible leader, Apple. This is something that is not given enough credit. And it is now capitalizing on this success through increasing Nexus sales and a planned "X Phone," which it is partnering with Motorola to develop. The product is rumored to have increased gesture and image recognition--something that Google Glass could also benefit from. Fourth, Google could then integrate this product into Google Glass.
I know "Google Glass" my seem far-fetched, but if Google could popularize the search engine and enter a tightly controlled market, I believe it can succeed in consumer electronics, too.
Given how unpredictable the tech sector can be, tech investors would be well-advised to diversify. Google and Seagate are attempting to break into new markets, but, in my view, only the former is reaching far and wide enough to capture meaningful growth and pay off the added costs of capital.
It's incredible to think just how much of our digital and technological lives are almost entirely shaped and molded by just a handful of companies. Find out "Who Will Win the War Between the 5 Biggest Tech Stocks?" in The Motley Fool's latest free report, which details the knock-down, drag-out battle being waged by the five kings of tech. Click here to keep reading.
David Gould has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google and Western Digital.. 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!