2 Tech Stocks with Positive Price Momentum to Buy, 1 to Avoid

By Ashish Sharma - July 6, 2012 | Tickers: AOL, EQIX, N | 0 Comments

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The following is a list of three technology stocks which have outperformed the broader markets in the last three months and have recently made new 52 week highs.

We believe AOL Inc and Equinix are likely to continue their upward journey. However, we are a bit cautious on NetSuite and would recommend avoiding it. Here is a look at each of these stocks in detail.

AOL’s business fundamentals are moving in the right direction and its management is taking steps to unlock shareholder value. AOL's Q1 EBITDA of $94 million was well above Street estimates of $77MM. Global advertising continued its upward trend, and the company’s advertising revenue showed its fourth consecutive quarter of Y/Y growth. In terms of value, AOL announced a ~$1 billion patent deal with Microsoft in April. In a more recent development, on June 28 AOL management indicated that all the proceeds from the Microsoft patent deal will be distributed to the shareholders by the end of 2012.

With increasing contributions from a number of acquisitions (including Huffington Post, Techcrunch and Goviral) AOL can expect a solid increase in revenues going forward. Some investors are a bit cautious about AOL’s content strategy and the amount it is spending on these initiatives. One of the major concerns investors have is AOL’s spending on Patch, a local knowledge platform. However, things are now turning around and these initiatives seem to be bearing fruits. Patch has performed well in the month of May with a 14% increase in unique visitors over April. It also moderated its losses and is expected to become profitable by the end of 2013. AOL’s increased focus on quality content, its growing area of display advertising, and its strong balance sheet of $400 MM in net cash makes it an attractive buy candidate.

Equinix’s global platform comprises 99 data centers in 38 strategic markets across America, Europe, and Asia-Pacific. Equinix is showing good top line and bottom line growth. Its net income for 1Q12 rose to $34.5 million from $25.1 million a year ago, while revenue grew by 25% to $452.2 million. With the increase in internet connected devices, data intensive apps, social networks, cloud computing, and electronic trading, Equinix could continue to post accelerated growth over the next few years.

Through its recent investments in emerging markets such as India and China, Equinix is focusing on expanding its global reach and scale. Equinix has increased its connectivity considerably with the acquisition of Ancotel GmbH and a controlling equity interest in ALOG Data Centers do Brazil. The company is likely to achieve $3 billion in revenues by 2015. With strong future prospects from the growth of internet data, we believe Equinix presents a good investment opportunity.

NetSuite is one company in the above list which we would recommend avoiding. Although Netsuite’s 1Q12 result was better than consensus expectations for revenue and EPS, it fell short on billings. While 26% year-over-year billings growth is pretty good, it is still a slowdown from 30% growth in the year-ago period and 36% growth in the prior quarter. With OneWorld, which has drove Netsuite’s performance for many quarters, set to be challenged by SAP AG’s and Oracle’s own SaaS offerings, the competitive pressure has increased considerably. Though Netsuite has had a considerable head start in the SaaS business, the gap is starting to narrow down. This is shown by the fact that the gross customer additions were down to 300 from 350 in the previous quarter. With shares trading at a 52 week high with a forward P/E of 162, we believe the risk-reward for the stock is skewed on the downside.

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