Despite the recent turbulence in the IT industry for 2008, I maintain that now is where you want to be. The reasoning here follows that the financial sector is struggling to keep its bad news buried, the housing market is in chaos, and even retailers are struggling to maintain growth. A move into technology seems entirely logical given strong international exposure, secure balance sheets and the fact that IT stocks have a historically low correlation to broader markets. Let’s pick some tech bulls.
Consumer Electronics: The Net Fool Picks Apple (NYSE: AAPL) Hey, Mr. Market, why are you so down on Apple? The iPod business is fully mature. The iPhone is losing inventory to similar devices. MacWorld was losing its usual superstar perspective. I’ll tell you what, take this news and know that Apple has historically gone all out when sentiment is low. Steve Jobs & Co. is my favorite IT pick for 2008. The downside has opened up stock value, and I feel have bottomed out!
Delving into the issues of concern. The iPhone was underselling due to Apple’s push for the new iPod Touch, with analysts at Needham noting that “Apple would have sold close to four million iPhones in its absence.” Add this to the fact that roughly 25%-30% of iPhones were “unlocked” from AT&T, a number that actually benefits AAPL through carrier headache. Although iPod sales are down, I feel like the mp3 device is just in a in transition phase, and there are now exciting opportunities in mobile technology.
I feel that AAPL can be a resistance to the recession. The Mac business is healthier than ever and more than makes up for losses on iPods. Investors are punishing high-end companies like Apple for any disappointment. The stock is 35% off its highs, trading at a 24x earnings premium compared to 32x for its peers and has a PEG of 0.7x. They have the free cash flow we love ($6.78/share est. 2008) and their business segments have never looked healthier. People hate this company for no reason. As Warren Buffet says: “Be fearful when others are greedy, and greedy only when others are fearful.”
COM. Team – The Net Fool Picks Corning (NYSE: GLW) Corning is the company you look to for LCD glass panels. This market is thriving with bigger and badder TVs coming out every day. Fourth quarter results showed management feels the same way due to continued investment in facilities and strong relationships with market leaders. The prospects for 2008 were VERY new and positive revenue streams are to be found in an estimated 60+% growth in LCD capex. GLW anticipates launching a new flexible fiberglass material and should be appreciated by the upcoming adoption of mandatory diesel filtration. No major catalyst it’s driving growth, which is definitely weird, but an attractive valuation recoups most of the risk.
Outside of the LCD glass, Corning continues to run the table. A new product “Gorilla Glass” that allowed input through the touch screen has been easily sold to mobile phone manufacturers. Corning seems to understand the move to mobile and is really focused. With this in mind, Standard and Poors added: “Sales accelerate to 17% growth in 2008, up from 13% in 2007, thanks to currency gains and, more importantly, due to higher demand for glass substrates for liquid crystal displays (LCD) from television and computer manufacturers”. It’s all working out for Corning, even Verizon is on board, a new buyer of GLW’s “ClearCurve” cable solutions. ClearCurve is the most flexible fiber in the world, 100 times more flexible than normal fiber… which apparently is very important. This new technology could unlock enormous potential Backed by an industry leader in FiOS.
Corning should be a central technology holding company for all investors. They remain cheap with a PEG of 0.83x and a forward PE of 13x versus an estimated trade value closer to 20x. There are some risks presented by excess capacity in the LCD glass industry and potentially slower IT spending. However, I feel that retailers will continue to buy the glass for larger screens and fiber for faster internet. If they’re overstocked and can’t sell, that’s their problem…not Cornings. These guys beat the profits by a dime and their outlook only got better. They are bullish across the board and deserve to trade at a premium in my opinion.
Solar Semiconductor: The Net Fool Picks First Solar (NYSE: FSLR) After doubting the extreme growth behind solar technology in January 2008, it seems that it is about time that He apologized power winners like First Solar. ThinkEquity Partners gave this great stock a one-word rating, “removing bottlenecks.” After crushing earnings estimates of 53 cents a share with a staggering 77 cent gain, they appreciated 30% the day after raising guidance from 2008. Don’t let this shopping marathon scare you. We thought the run-up to the solar industry was over and they were clearly proven wrong. the year after year 280% revenue growth and strength in EPS suggests greater future earnings power.
Operating efficiency is one of the main benefits I saw from operating in 2008. Average costs per watt ($1.12) were down 6% for the year, and the negative impact of the Euro currency was almost dwarfed by entirely from economic operations at the First Solar plant in Malaysia. . Points for improvement have been identified and most analysts feel they can take home the gold. In particular, the first and second quarters of 2008 should show continued growth in line with the appreciation of 2007. All solar companies trade at attractive premiums when considering growth. With oil moving up, it looks like the green energy push Will stay strong. Investors should return to the solar field with strong profits and demand in mind.
The upgrade of the Malaysian plant may have a negative impact on First Solar’s first quarter 2008 earnings. On the other side of the coin, we expect an increase in production and see operating margins remain at levels above 30%. I wouldn’t be at all surprised to see more good news in guidance. We expect their PE and PEG ratios to be more in line with the industry as the current premium they appear to be trading at is a result of explosive growth over the past year. The execution was impeccable in 2007, and with nothing but green lights so far… First Solar represents a great long-term growth play.
Technological infrastructure. – The Net Fool chooses Akamai (NYSE: AKAM) Akamai is alive and well in 2008. After considering them in early 2007, they have continued to show strength in their industry. In a recession-prone market, there is a bit of security surrounding an Internet-based business. There are VERY strong demand for entertainment and media on the Internet, and Akamai is the ideal company to deliver the products. AKAM posted a huge jump in earnings during the fourth-quarter earnings call, which easily beat analysts’ estimates. after growing Forecast for 2008 With the continuing demand for streaming media on the net, it’s becoming difficult to make this company have a negative effect.
Akamai Technologies has had an amazing run over the years. Frustrating the bears once again on its latest earnings call, AKAM gained momentum from its 52-week lows. They have now extended their streak of sequential earnings and earnings growth to 20 consecutive quarters! Plus, your bottom line is as healthy as ever; they have once again increased free cash flow to $634 million from $566 million. With a leading role in a driving content delivery market, analysts such as Canaccord Adams suggest the potential growth in revenue and earnings.”in excess 30% for the next few years.”
Analysts often question Akamai’s assessment of whether they are cheap or online. I think they are on the cheap side as they are 45% off their 52-week high and trading at a 0.7x PEG. Might be tempted to test the waters if they drop below $32. They are trading at a slight premium on a P/E basis, but I think this is more than deserved as they appear to be a confident recession holding onto tech from information. With price sensitivity expected to fade along with declining bandwidth costs, it would appear that Akamai’s market needs to be addressed in the next few years.
That’s it for information technology. There are certainly some excellent stocks to be found in the sector, despite the notion that technology is always more volatile and dangerous than finance, conglomerates and the like. While February is a historically bad season for IT, I wouldn’t mind doing my market shopping a little earlier with a host of negative sentiments unfairly dragging down perfectly healthy businesses.
-The fool of the network
