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Other: Our Top Ten Tech Stocks
By: II Staff (06/07/00)
As investors have embraced the new economy in the last few years, many young tech and Internet companies have thrived.
Though not all these companies have what it takes to form the pillars of this next generation economy, many show great promise for the future. Among them, there are a number of tech and Internet stalwarts that have earned investor loyalty, especially when the market is strong.
However, all these stocks, both the good and the bad, were tossed out this spring as investors abandoned their tech and Internet positions on concern about rising interest rates and sky-high valuations.
But, when the market comes back-last week could have been the beginning of the recovery-a number of stocks will lead the way. We have identified 10 stocks that should resume a steady upward move when the market rallies for a sustained period of time.
They range from established companies like Magic 25 Motorola that have successfully reinvented themselves, to early Internet winners like America Online to biotechnology companies like Human Genome Sciences.
Here are our 10 favorites, in alphabetical order.
Click here to see the entire list of our top ten tech stocks, along with some key metrics.
America Online (NYSE: AOL - news)
Immensely profitable, hugely popular and only getting more so, America Online is arguably the highest quality Internet stock out there. And once it consummates its planned $190 billion merger with Time Warner (NYSE: TWX - news), AOL will be among the highest quality media companies as well.
Although uncertainty in advance of the merger could hold it back over the near-term, the company's financial results and ever expanding list of new initiatives will keep investors confident of its future success.
As its ``AOL Anywhere'' strategy rapidly comes to fruition, the company will grow from being the most formidable Web company on the desktop to the most formidable Web company - you guessed it -anywhere.
Coming soon:
AOL will deliver e-mail, instant messaging and national and localized content not only to users' desktop computers, but also to mobile phones, PDAs, pagers, Internet appliances and televisions. AOL currently has deals with Nokia (NYSE: NOK - news), Sprint PCS (NYSE: PCS - news), Motorola (NYSE: MOT - news), BellSouth (NYSE: BLS - news), Research in Motion (NASDAQ: RIMM - news) and Arch Communications. With these companies, AOL will deliver wireless content from its own properties, such as MoviePhone, MapQuest and Digital Cities, and should soon be able to offer all of Time Warner's as well.
Following an October deal with Gateway (NYSE: GTW - news), AOL has unveiled the first three co-branded Internet appliances, which are low-cost, counter-top devices specifically designed to be quick on-ramps to America Online's Internet services.
Through AOL TV, the company will offer interactive television, starting this summer.
And through AOL Plus, the company now offers specialized content for broadband Internet connections. The company is involved with several broadband ISPs, including Bell Atlantic (NYSE: BEL - news) and Hughes Electronics (NYSE: GMH - news), with whom it is currently beta-testing satellite-based high-speed Net access. The company also hopes to gain access to Road Runner, a cable broadband ISP partially owned by Time Warner.
The stock closed Tuesday at $55.63.
Broadcom Corp. (NASDAQ: BRCM - news)
Broadcom, a maker of Silicon integrated circuits (IC) is poised for a protracted rebound if the tech sector reverses its near-term downtrend.
However, recent skepticism about whether the current economy will slow technology growth or create damaging inflationary conditions hasn't helped the stock. And that begs the question: Can Broadcom continue to grow at a pace that warrants such a valuation premium to the broader market?
Despite the fact that the stock, at $159, is currently priced 38% below its 52-week high, it still trades at a P/E of 201 times the First Call consensus earnings estimate of $0.79 a share for 2000. But as long as economic conditions in the U.S and abroad remain relatively healthy, the stock's rich multiple is warranted.
Broadcom is a true market leader in IC production, a market that shows no tangible signs of slowing ahead. Customers are still lining up in droves to purchase its broadband application chips for cable-TV set-top boxes, high speed modems, HDTV and its original business of providing digital signal transmission over existing analog, copper-wire infrastructures.
In May, Broadcom entered the optical networking arena, releasing a groundbreaking 10-gigabit Ethernet transceiver to speed up local (LAN) and wide area (WAN) networks. We expect the company to leverage this new business into accelerating bottom-line growth for the next four to five years.
In addition, Broadcom management, armed with an A-plus, virtually debt-free balance sheet and strong projected cash flows, is looking to double annual revenue through multiple acquisitions. This is almost twice the previously projected growth rate. As a result, the likelihood of better-than-expected revenue, earnings and, ultimately, P/E multiple expansion, is strong.
Click here to see the entire list of our top ten tech stocks, along with some key metrics.
BroadVision (NASDAQ: BVSN - news)
Amid the avalanche of recent selling on the Nasdaq, BroadVision's excellent first quarter performance went virtually unnoticed. The company recorded $61.5 million in revenue, a 40% sequential advance, and earned $0.04 per share in the process, roughly twice what analysts expected.
The reason for the growth? Large enterprises need what BroadVision sells: Software that allows companies to maximize their relationship with customers, suppliers and employees. And as more global 2000 companies opt to buy application software rather than have their own information technology groups develop it internally, BroadVision stands to benefit.
The company licensed 110 new customers in the first quarter, expanding into energy health, media, government and B2B marketplaces. And not only is BroadVision profitable, it carries $370 million in cash and cash equivalents on its balance sheet.
Such factors have made it easier for IT professionals to make long-term commitments to the software maker. BroadVision's average deal size now stands at roughly $400,000, which includes total license and consulting revenue for an end user.
Repeat customer business is one of the more attractive aspects of the company's business model. As existing customers expand their web sites and incorporate new products, they pay additional license fees to BroadVision. Nearly 50% of its first-quarter revenue came from existing customers.
Although BroadVision's valuation-its stock closed Tuesday at $49.50-will likely remain high for some time, we believe the company is best positioned to capitalize on a huge market, one which could get considerably larger once corporations use technology to design web sites that facilitate communications with and among its own employees (B2E).
Foundry Networks (NASDAQ: FDRY - news)
After a sizzling 1999 debut propelled its stock from $25 to $212, Foundry Networks' shares have pulled back sharply in recent months. The company's valuation took a $17 billion haircut, but now the stock looks attractive.
Foundry makes networking and Internet access equipment. Competing with the likes of Cisco Systems (NASDAQ: CSCO - news) is not an easy task, but Foundry is more than holding its own. After all, Foundry Networks is the fastest-growing Internet equipment company around.
First quarter sales shot up 355% to $70 million. Per share profits grew at an even faster clip thanks to tight cost controls and a limited head count in its sales force.
Foundry is a prime beneficiary of the Internet's explosive growth. Thanks to surging demand, Internet service providers (ISPs) need to buy more switches and routers to handle Internet traffic. ISPs make up 65% of Foundry's sales. In contrast, most competitors see the bulk of their sales go to corporations that are looking to beef up their own Web presence.
That emphasis helps position Foundry for strong growth in the quarters to come as well. According to a recent study by the Synergy Research Group, the ISP market grew four times faster than the corporate market in 1999. That trend is expected to continue through this year and next, when the ISP market for switches and routers is expected to reach $28.9 billion, passing the projected $26.9 billion take of the corporate market.
Foundry's white-hot growth looks sustainable as the company has just started shipping a new line of higher-profit routers. The Tolly Group, an industry analysis group, says Foundry's gear is the fastest in the business.
And thanks to the recent market rebound, shares of Foundry have surged ahead in recent days from a low of $51.88 to around $92.27. That's still well below its high of $212 just three months ago. Look for shares of Foundry to rocket higher if tech stocks can maintain their current momentum.
Click here to see the entire list of our top ten tech stocks, along with some key metrics.
Human Genome Sciences (NASDAQ: HGSI - news)
Genomics leader Human Genome Sciences saw its shares skyrocket earlier this year as investors began to better understand the opportunities associated with decoding the human gene map. But like many of its tech and biotech sector counterparts, the stock has swooned in recent months. Now, shares, which traded as high as $232.75, appear to be resuming their upward trend. They were last seen around $122.
HGS has made significant progress in advancing its research into clinical trials. Currently, the company has two proprietary therapeutics in human clinical trials, with a third expected to begin trials soon. HGS enjoys a robust discovery platform that has validated the company's ability to leverage its leadership position in genomics into tangible drug development opportunities.
HGS shares are poised to continue to lead the biotech sector as the company advances new drug candidates into clinical trials and forges new technology alliances with leading pharmaceutical and biotechnology companies. HGS is well financed, with cash of more than $900 million.
Genomics will continue to revolutionize the discovery of new drugs and HGS is a pacesetter in the industry. With numerous catalysts over the coming months HGS shares are likely to move sharply higher as it further validates its research efforts.
Kemet (NYSE: KEM - news)
Kemet should continue to reap record profits as demand greatly outstrips supply for both its tantalum capacitors and multiplayer ceramic capacitors used in a wide variety of electronic applications, including communication systems, data processing equipment, personal computers, automotive electronic systems, and military and aerospace systems. ``If we were to try to satisfy all the perceived demand out there today, we and all of our competitors would need to double our capacities,'' said CEO David Maguire in a recent statement.
This voracious appetite from a wide range of original equipment makers (OEMs) - Ford, Motorola, Intel, and IBM, to name a few - has enabled Kemet to increase its average selling prices (ASPs). The combination of higher prices and higher volume should persist well into 2001 due to capacity constraints within the sector.
Despite its strong run-up this year (64% for the year to date), Kemet, which closed at $37.38 on tuesday, is still trading at a mere 17 times split-adjusted 2001 estimates of $2.13 (year ends March 31). Kemet earned a split-adjusted $0.85 in fiscal 2000, implying earnings growth in excess of 150%.
Considering that Kemet has beaten I/B/E/S estimates by an average 35% in each of the last four quarters, forward estimates could prove conservative.
Further upside could come from Kemet's alliance with Japanese manufacturer Showa Denko and the 30,000 feet of additional capacity at its ceramic capacitor manufacturing facility in Fountain Inn, S.C.
Click here to see the entire list of our top ten tech stocks, along with some key metrics.
Micron Technology (NYSE: MU - news)
Micron Technology is the leading U.S. manufacturer of dynamic random access memory (DRAM) and the third largest worldwide producer with an estimated 20% worldwide market share. DRAM prices have been increasing on the spot market over the past few weeks, a trend that should accelerate over the next few months.
Since DRAM is a commodity chip, its price is influenced by the demand for the product relative to the supply. But supply is tight, as minimal investment was made in new capacity over the past few years. As a consequence, as demand increases and supply is not readily available, prices firm and trend higher.
There are several factors that should drive DRAM prices higher in coming months, and Micron is uniquely positioned to capitalize. PC demand has firmed, and the average content of DRAM per PC is increasing.
DRAM is in hot demand in the ever-burgeoning server market, where the content per machine is several times that in a PC. DRAM is also finding its way into non-PC markets, such as the communications market, which represents a new growth opportunity.
Micron is the world's lowest cost producer of DRAM, a key advantage in a commodity industry. Many global producers are still not profitable, selling chips at current market prices, and, as a result, are not spending on new manufacturing facilities.
Micron is very profitable at current prices, and is constantly improving its manufacturing efficiencies. Despite a tremendous surge in share price, Micron is poised to continue its ascent over the next few months as DRAM prices move meaningfully higher from current levels. Micron has huge earnings leverage and the current up-trend that is in place is likely to last longer than most Wall Street analysts expect.
Motorola (NYSE: MOT - news)
Magic 25 component Motorola (NYSE: MOT - news) has been hit pretty hard of late despite being on track to have its best operating performance in six years.
In its most recent quarter, the company only beat estimates by a penny per share, posting earnings of $0.59 per share. And the stock, which closed Tuesday at $37.19, is off nearly 40% from its high.
Shrinking margins in Motorola's personal communications systems (PCS) unit, which accounts for about 36% of sales, was the major reason for this downfall.
Now the company is struggling to reposition itself against its competitors, opting for the lower end of the pricing spectrum. As a result, management was forced to push back its 8-10% operating margin goal for the PCS unit, and guided analysts to slightly lower their earnings estimates.
Recent data from the Semiconductor Industry Association (SIA) shows that chip demand is at an all-time high due to strong demand for wireless communications devices. We believe overall demand in the industry will insulate Motorola from its PCS business' pain until later in the year when management straightens out its product line.
The bigger picture still looks great for Motorola. The company is rebuilding its own semiconductor business and is reporting ramping sales growth in its set-top boxes and cable modems.
It's expected to produce sales of roughly $38 billion for the year, marking a 20% increase. Management's current earnings per share guidance of $1.05 implies a 50% increase from last year, which would give the company its best growth figure since 1995.
At its recent closing price, the stock trades at 35.8 times and 26.3 times 2000 and 2001 earnings estimates, respectively.
On a valuation basis, Motorola trades at about one-third the value of its European counterparts, Nokia (NYSE: NOK - news) and Ericsson (NYSE: ERICY - news). All three of these firms are technology bellwethers, and we believe that this disparity will considerably narrow in the near future.
Click here to see the entire list of our top ten tech stocks, along with some key metrics.
Siebel Systems (NASDAQ: SEBL - news)
Siebel Systems should continue to post impressive results due to its dominance of the traditional customer relationship management (CRM) software market and the strong growth in the e-CRM applications market. With control of more than 17% of the market - up from 15.4% in 1998 - Siebel is the undisputed CRM king.
International Data Corp. (IDC) expects the CRM market to grow from $1.35 billion in 1999 to $8.9 billion in 2002 - a compounded annual growth rate of 46%. Similarly, the market for so-called e-CRM applications is expected to reach $10 billion by 2003, up from $2.3 billion in 1999, which implies a compounded annual growth rate of 45%.
Given Siebel's dominance in the traditional CRM arena, Siebel can leverage its e-business applications into its large installed base. The company has first-mover advantage in this space, having introduced the first entirely web-based family of CRM products, Siebel 99, in December of 1998. It also recently launched its Siebel eBusiness Applications (Siebel 2000) suite of over 140 product modules.
Siebel has over 65 strategic alliances, including deals with IBM (NYSE: IBM - news), Ariba (NASDAQ: ARBA - news), BroadVision (NASDAQ: BVSN - news), i2 Technologies (NASDAQ: ITWO - news) and Palm (NASDAQ: PALM - news). In February, IBM announced that it selected Siebel's eBusiness suite for global deployment across its entire organization.
When completed, this deployment will serve more than 50,000 IBM users, 30,000 IBM business partners and millions of customers over the web. We view this as a tremendous endorsement of Siebel's product as it represents the first true eCRM rollout in which a global company is integrating all of its communication channels on a single vendor platform.
VeriSign Inc. (NASDAQ: VRSN - news)
Thanks to VeriSign, many individuals and businesses feel more secure conducting business online. VeriSign is a global leader in providing trust services such as authentication, validation and payment services to websites and businesses to ensure secure electronic commerce and communications over the Internet.
Driving VeriSign's business is the explosive growth of e-commerce and the proliferation of web sites. Industry research firms estimate that there will be over 194 million people online by 2001 and online retail sales should reach $3.2 trillion.
The burgeoning e-commerce market has created a huge demand for the company's products. To meet such demand, VeriSign has grown both internally and through synergistic acquisitions. Recently, the company agreed to buy Network Solutions (NASDAQ: NSOL - news), the leading Internet domain registrar, for $21 billion.
VeriSign, with its proprietary WorldTrust software platform, has also established relationships with technology behemoths like Microsoft (NASDAQ: MSFT - news), British Telecom (NYSE: BT - news), Cisco Systems (NASDAQ: CSCO - news) and Motorola (NYSE: MOT - news) to ensure wide utilization of its digital certification services and assure compatibility with a variety of networks.
VeriSign derives 85% of its sales domestically. As a result, the untapped international market presents a huge opportunity for accelerated growth of the company.
The Internet's exponential growth should continue to fuel greater demand for safe electronic commerce. As this trend continues, VeriSign's products will be called upon to play cyber-cop. Recent intrusions of web sites such as eBay (NASDAQ: EBAY - news) and America Online (NYSE: AOL - news) , which halted service for several hours, have already highlighted the need for greater online security.
As a result, VeriSign stands out as one of the best-positioned companies to profit from the digital economy.
Click here to see the entire list of our top ten tech stocks, along with some key metrics.
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