It's been a rocky, uneven earnings season for the tech sector. But if you know where to look amid all the noise and numbers, there are clues that can help you find the best tech stocks to buy now.
Until Apple Inc. (Nasdaq: AAPL) and Facebook Inc. (Nasdaq: FB) reported this week, tech stock investors had almost uniformly glum news from the biggest names in the sector.
Google Inc. (Nasdaq: GOOG), Microsoft Corp. (Nasdaq: MSFT), Intel Corp. (Nasdaq: INTC) and Yahoo! Inc. (Nasdaq: YHOO) all disappointed to some degree.
"The tech sector's relative performance versus the S&P 500 has been dismal for a long time and signaling that we're going to have a tough earnings season," Hugh Johnson, chairman and CIO of Hugh Johnson Advisors, told Breakout.
But investors need to avoid the knee-jerk reaction of interpreting a few earnings stumbles by some big names as a flashing red exit sign for tech.
While some big tech companies are indeed facing serious challenges, several are on the verge of major turnarounds.
"I see this as a transitional quarter," said Money Morning Defense & Technology Specialist Michael Robinson.
What's more, some positive data buried in several of these reports point very strongly to the next big growth areas for the sector, and by extension to the best tech stocks to buy now.
Which Titans Are Among the Best Stocks to Buy Now?
Earnings in any given quarter usually don't give a complete picture of what's going on with a given company and which direction it's headed. This quarter's batch of earnings was a prime example of that:
- Microsoft: Like Intel, Microsoft got slammed this quarter for its inability to transition its business to the "mobile wave" of smartphones and tablets. Revenue was up, but missed estimates by almost 4%. And profits, at $0.59 a share, were woefully below the estimates of $0.75 a share.
But the key news was the $900 million charge for its unsold pile of Surface tablets - evidence that CEO Steve Ballmer's latest mobile strategy has failed. "As long as Ballmer is the CEO, Microsoft will be a laggard," Robinson said.Bottom line: MSFT is not a tech stock to buy now -- at least until Ballmer gets his long overdue pink slip.
- Yahoo: While Yahoo's profits were up 46%, revenue was down 7%, an ongoing problem for the once Web pioneer. Worse, YHOO cut its full-year revenue guidance, giving investors more reason to worry. Given that the stock is up nearly 80% over the past 12 months under CEO Marissa Mayer, the question has become whether any more gains are possible.
"Yahoo needs to prove it can grow sales and integrate [recent acquisition] Tumblr in a way that grows profits," said Robinson.
Bottom line: Yahoo would not be a tech stock to buy now but for its stake in Alibaba which could pay off handsomely if and when that Chinese e-commerce company goes public.
- Intel: Intel has struggled with the transition to the mobile wave for years, but this quarter really felt the pinch. Profits plunged 29% and revenue slipped 5%.
And yet as bad as it looks, Robinson likes Intel's prospects going forward. He noted that INTC recently struck a deal with Samsung to put its Atom chips in the Galaxy Tab 3, and is expanding in other areas such as wireless data centers With mobile chips making up just 1% of Intel's business, Robinson says Intel stock could more than double.
Bottom line: Intel is a tech stock to buy now.
- Apple: Wall Street was thrilled that Apple beat expectations (its stock rose over 5% Wednesday), but in reality the results were less-than-stellar. Analysts were mostly pleased that iPhone sales were higher than expected, but Apple is still losing share in both phones and tablets to devices running Google's Android.
"I'm concerned that Android is eating into the market share of their core products, especially the iPad," said Robinson. While Apple is still making gobs of money, growth significant enough to move the stock higher will only come with at least one new breakthrough product.
Bottom line: AAPL is a tough call, but unless you have faith that a new game-changing product is imminent, it's not a tech stock to buy now.
- Google: Wall Street overreacted to Google's decline in prices for ads at first, but then looked at the 20% increase in sales in its core business as well as a tidy 16% increase in profits.
But Google's earnings don't tell the story of its potential. Robinson likes how GOOG seized upon the mobile wave with its now-dominant Android operating system, and how it keeps expanding into exciting new areas of tech growth, from wearable computers like Google Glass to robotic cars to augmented human intelligence.
"This stock is poised to gain roughly 50% by the end of 2015, and that's on the heels of a two-year run of 70% gains," Robinson said.
Bottom Line: Google is a tech stock to buy now.
- Facebook: The most reviled of the big tech stocks had by far the best earnings, blowing away expectations. Facebook's top line soared 53% largely on the strength of a surge in mobile ad revenue, sparking a jump in the Facebook stock price of nearly 30% in Thursday's trading.
Yet Money Morning Chief Investment Strategist, Keith Fitz-Gerald, a long-time critic of Facebook, retains his reservations. Fitz-Gerald pointed out that the gains in mobile looked impressive mainly because of an easy year-ago comparison, when FB had relatively little mobile ad revenue.
And given the competition for mobile ad revenue from the likes of Google and others, as well as the virtually non-existent barrier to entry for direct competitors, Fitz-Gerald stands by his belief that "Facebook has absolutely no place in the average investor's portfolio."
Bottom line: Facebook is definitely not a tech stock to buy now-and probably not ever.
How to Find the Up-and-Coming Best Tech Stocks to Buy Now
While Robinson clearly thinks several of the tech titans are among the best tech stocks to buy now, he says they are often not the best bellwethers for tech and especially not for the sectors of tech from which the most growth will come, like cloud computing and "Big Data."
Instead, Robinson recommends that investors keep an eye on a company like SanDisk Corp. (Nasdaq: SNDK), which makes solid state hard drives as well as the flash memory used in mobile devices.
"SanDisk gives us a look at three key sectors in one stock," Robinson said, noting that its products are used in mobile wave devices as well as servers used for cloud computing and Big Data.
Oh, and SanDisk's earnings quadrupled from the year-ago quarter. With plenty of growth in front of it, clearly SanDisk is also one of the best tech stocks to buy now.
Speaking of Big Data, Robinson has another tech stock that he watches closely to track that sector of tech. The high-powered equipment it makes helps other companies design aircraft and autos, model new drugs and run weather simulations.
Here's the company that Michael Robinson considers the top bellwether for Big Data
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.