5 Tech Stocks to Avoid
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Tech stocks are still the darlings of many investors, especially the largest and best known companies. With technology constantly evolving, there always seems to be more and more ways for large companies to capitalize on their size and research budgets. The best known companies often have their stocks bid up in anticipation of these future revenue streams. Let’s look at some better known names to see if they may be worthy of our hard earned money.
Apple Inc. (NASDAQ: AAPL) – At a recent closing price of $419.81, one of the investing world’s favorite stocks stands just below its all time high. The 52 week high of $427.75 was reached less than a week ago, and the 52 week low occurred in June 2011 at $310.50. Having rebounded smartly since last summer, approximately 36%, market capitalization now stands at $390.17 billion
The company is expected to report record sales of iPhones when it reports earnings, possibly as many as 12 million units in the last three months of 2011. In addition, the company has recently announced it will begin selling the iPhone 4S in China and other countries within the next week. At that point iPhone 4S will be available in nearly 90 countries.
The company is about to receive some competition from fellow tech giant Google with GOOG’s pending purchase of phone maker Motorola Mobility Inc. (MMI). This purchase, expected to close in 2012, will be an addition to the already popular Android phone. Unfortunately for GOOG the most recent quarterly sales for MMI were less than expected due to increased competition and higher legal costs.
Both AAPL and GOOG have excellent prospects going forward as they become more competitive with each other. With a recent operating margin of 32.76% GOOG slightly bests the 31.22% operating margin for AAPL, and GOOG’s profit margin of 26.78% is also slightly better than the 23.95% profit margin for AAPL. On the other hand, return on equity of 41.67% for AAPL far exceeds the 19.52% return for GOOG, and AAPL’s return on assets of 22.05% far exceeds the 11.96% return for GOOG.
Even with increased competition and the passing of Steve Jobs, AAPL is expected to continue its domination of the handheld market. This, along with an expected positive earnings report, is most likely already reflected in its stock price. Despite the possibility of a run even higher into earnings, for now avoid AAPL until direction can be discerned after the Jan. 24 earnings report.
Intel Corporation (NASDAQ: INTC) - At a recent closing price of $25.14, the company is sitting just under its 52 week high of $25.92 and nearly 32% higher than the 52 week low of $19.16 set in September 2011. Current market capitalization stands at $128.0 billion.
In a December 2011 announcement the company issued an advisory that fourth quarter revenues will be approximately $1 billion below its previous guidance. This is due mainly to a shortage of hard drive production as a result of the worst flooding in Thailand in decades. The Semiconductor Industry Association also reported that the ongoing euro crisis has also negatively impacted worldwide sales as of late. These issues will also impact its much smaller but dogged competitor, Advanced Micro Devices, Inc. Co. (AMD). However, the supply shortage is expected to resolve itself sometime in the first part of 2012.
The company towers over AMD not only in size but in efficiency as well. Operating margins of 32.77% for INTC far exceed that of 6.62% for AMD. Profit margins for AMD of 15.98%, while decent, still does not match the 24.75% profit margin for INTC. Recent quarterly revenue growth for the company of over 28% far outstrips that of 4.4% for AMD. For now, avoid the stock while it hangs around 52 week highs and the company works to resolve its supply issues.
Microsoft Corp. (NASDAQ: MSFT) - At a recent closing price of $28.25, the company is currently trading in the higher end of a somewhat narrow 52 week range. The 52 week high of $29.46 was reached nearly a year ago in January 2011, and the 52 week low of $23.65 was reached in June 2011. This results in a current market capitalization that stands at $237.64 billion.
The company just announced that it too, like INTC and AMD, will be negatively impacted by flooding problems in Thailand. In addition, a report by International Data Corporation stated that worldwide PC shipments fell slightly in the fourth quarter of 2011 compared to the end of 2010. These issues also negatively impacted competitor Oracle (ORCL) as reflected in their latest earnings release and guidance released in December 2011.
These issues are partially reflected in year over year revenue growth for both companies, with MSFT recording 7.3% growth compared to only 2.4% for ORCL. Margins remain rather high at both companies. MSFT operating margins of 38.78% slightly beat the 36.96% margin for ORCL. Profit margins of 33.01% for MSFT also beat the 25.49% margins for ORCL. Avoid this stock for now while it remains near 52 week highs and works to resolve supply issues during the first quarter of 2012.
Yahoo! Inc. (NASDAQ: YHOO) - At a recent closing price of $15.48, the company has been trading in a rather narrow two dollar range since October 2011. The 52 week high of $18.84 was reached in May 2011, and the 52 week low of $11.09 was reached in August 2011. Current market capitalization stands at $19.2 billion.
The company has been the subject of buyout rumors for some time. Companies like GOOG, MSFT and Chinese internet company Alibaba have all been rumored as potential suitors. Ironically, one report had the company itself being a potential buyer of Netflix, Inc. (NFLX). Whether or not the company will become an acquirer like competitor AOL Inc. (AOL) remains to be seen. Either way, the company has to somehow resolve the issue of revenue growth, which currently stands at -24% year over year, versus -5.80% for AOL. Operating and profit margins of 15.89% and 20.55% still compare favorably though to AOL’s 5.60% and 2.54%. The company’s forward price to earnings ratio of 17.60 is much better than the ratio of 43.97 for AOL. Despite YHOO being a better buy going forward than AOL, avoid the stock until there is a breakout from its narrow trading range one way or the other.
NVIDIA Corp. (NASDAQ: NVDA) - At a recent closing price of $13.73, the company has been stuck in the lower end of its 52 week range since mid-2011. Its 52 week low is $11.47 reached in October 2011, and the 52 week high of $26.17 was reached in February 2011. This results in a current market capitalization for the company of $8.38 billion.
This week the company announced the creation of a new mobile computing processor that brings improved performance with less power usage to computing tablets and phones. This could bode well for the company in 2012 as semiconductor sales are projected to rise over 2% from 2011 levels. This estimate however has been reduced from a previously projected 4.6% growth due in part to the natural disaster in Thailand. As noted above the flooding in Thailand has reduced supply of critical hardware for many tech companies, including competitors AMD, INTC and others.
Despite the supply shortage NVDA’s financials appear to continue to hold up better than its smaller rival AMD. Year over year revenue growth of 26.30% for NVDA far outpaces that of 4.40% for AMD. Year over year earnings growth of 110.10% for NVDA also far outpaces the flat earnings growth for AMD. However, the positive financial numbers don’t seem to be reflected very much in its price. Having continued in a downward trend for nearly a year, avoid the stock until there is some evidence of a rebound and break of the current trend, which would be best seen once its price breaks over $16.
Motley Fool newsletter services recommend Apple, Google and NVIDIA. The Motley Fool owns shares of Apple, Google, Intel, Microsoft and Yahoo!. Vatalyst 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.