Tech IPO Boom: Looking for Attractively Valued Software Stocks?

If there were any doubts about whether the tech boom was back in full swing, they were blown away after LinkedIn went public on the NYSE last week, writes Matt Barrie at the Sydney Morning Herald.

LinkedIn jumped 84% on its first day of trading -- the biggest initial public offering (IPO) for a tech company since Google listed in 2004. And there is speculation that other tech companies will soon complete their IPOs -- names like Zynga, Groupon, Yelp, Twitter, and Facebook, just to name a few.

"What's different compared to the boom in 2000 is that most of these companies have real business models (read: something other than advertising), and furthermore, revenue," writes Barrie. "This time around, the speed at which some of the latest tech companies have grown revenue is simply staggering."

"The Internet allows scale and distribution at a level that is unprecedented in history. Throw up a website on a shoestring budget, and you can instantly reach the 2 billion people currently on the Internet. And guess what? The other 5 billion are coming."

If you're not convinced of the legitimacy of the tech boom, consider this: Facebook took seven years to reach 600 million users. Twitter took five years to reach 200 million users. Cityville reached 100 million users in 45 days. For tech companies, there is an "unbridled opportunity if you get the business model right."

That said, investors have to be careful not to overpay for the hype. For that reason, we wanted to find a list of undervalued software and Internet stocks. We started with a universe of about 400 stocks, and identified those trading at the biggest discounts to their industry averages -- based on the price to earnings (P/E) ratio, price to earnings growth (PEG) ratio, and price to cash-flow (P/CF) ratio.

We then narrowed down the list by focusing on analyst estimates. By comparing each stock's current price to the average analyst target price (which we use as a proxy for fair value), we can get an idea of the potential upside for each name, based on analyst projections.

All of the stocks mentioned below have an implied upside of more than 16% from current levels, based on Wall Street analysts' target prices.

Use this list as a starting point for your own analysis. The list has been sorted by discount to the average analyst target price. (Click here to access free, interactive tools to analyze these ideas.)

1. iGATE (Nasdaq: IGTE  ) : Information Technology Services Industry. Current price at $17.88 vs. average analyst target price at $23.6, which implies an upside of 31.99%. Trailing 12 month P/E ratio at 18.49 vs. industry average at 18.58. PEG ratio at 0.97 vs. industry average at 1.36. P/CF ratio at 14.8 vs. industry average at 15.17.

2. Activision Blizzard (Nasdaq: ATVI  ) : Multimedia & Graphics Software Industry. Current price at $11.38 vs. average analyst target price at $14.51, which implies an upside of 27.5%. Trailing 12 month P/E ratio at 26.47 vs. industry average at 57.2. PEG ratio at 1.99 vs. industry average at 3.24. P/CF ratio at 13.23 vs. industry average at 20.47.

3. Blue Coat Systems (Nasdaq: BCSI  ) : Business Software & Services Industry. Current price at $23.41 vs. average analyst target price at $29.8, which implies an upside of 27.3%. Trailing 12 month P/E ratio at 18.22 vs. industry average at 32.48. PEG ratio at 1.52 vs. industry average at 2.09. P/CF ratio at 11.13 vs. industry average at 15.65.

4. NetScout Systems (Nasdaq: NTCT  ) : Business Software & Services Industry. Current price at $22.86 vs. average analyst target price at $28.73, which implies an upside of 25.68%. Trailing 12 month P/E ratio at 26.17 vs. industry average at 57.2. PEG ratio at 1.52 vs. industry average at 3.24. P/CF ratio at 20.1 vs. industry average at 20.47.

5. Progress Software (Nasdaq: PRGS  ) : Application Software Industry. Current price at $26.82 vs. average analyst target price at $33.25, which implies an upside of 23.97%. Trailing 12 month P/E ratio at 26.01 vs. industry average at 57.2. PEG ratio at 1.73 vs. industry average at 3.24. P/CF ratio at 16.1 vs. industry average at 20.47.

6. Radiant Systems (Nasdaq: RADS  ) : Business Software & Services Industry. Current price at $19.37 vs. average analyst target price at $23.88, which implies an upside of 23.28%. Trailing 12 month P/E ratio at 29.73 vs. industry average at 57.2. PEG ratio at 2.16 vs. industry average at 3.24. P/CF ratio at 17.38 vs. industry average at 20.47.

7. Lawson Software (Nasdaq: LWSN  ) : Application Software Industry. Current price at $11.05 vs. average analyst target price at $13.19, which implies an upside of 19.37%. Trailing 12 month P/E ratio at 39.54 vs. industry average at 57.2. PEG ratio at 2.33 vs. industry average at 3.24. P/CF ratio at 17.79 vs. industry average at 20.47.

8. Monotype Imaging Holdings (Nasdaq: TYPE  ) : Application Software Industry. Current price at $14.01 vs. average analyst target price at $16.5, which implies an upside of 17.77%. Trailing 12 month P/E ratio at 25.07 vs. industry average at 57.2. PEG ratio at 2.03 vs. industry average at 3.24. P/CF ratio at 16.61 vs. industry average at 20.47.

9. Symantec (Nasdaq: SYMC  ) : Security Software & Services Industry. Current price at $19.3 vs. average analyst target price at $22.54, which implies an upside of 16.79%. Trailing 12 month P/E ratio at 24.91 vs. industry average at 57.2. PEG ratio at 2.62 vs. industry average at 3.24. P/CF ratio at 11.74 vs. industry average at 20.47.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research. Note: The numbers on top of items represent the forward P/E ratio, if available.


 

Kapitall's Eben Esterhuizen does not own shares of any companies mentioned.

The Motley Fool owns shares of Activision Blizzard. Motley Fool newsletter services have recommended buying shares of and creating a synthetic long position in Activision Blizzard. 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.


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