Is Now the Time to Buy Tech Stocks?

It's been more than a decade since the dot-com bubble collapsed. Apart from the brief love/hate affair with social-media stocks, Wall St. largely shunned the tech sector in 2012, leaving many fundamentals-based analysts to scratch their heads in puzzled amusement.

Over the past five years, vast swathes of the tech sector, including both hardware and software companies, have been no more volatile than any other industry. In addition, the tech sector is sitting on a pile of cash, about $380 billion, excluding long-term securities. 

Many information technology stocks are currently trading at or below the broader S&P index's 15.9 average P/E, including giants Apple (NASDAQ: AAPL  ) , Intel (NASDAQ: INTC  ) , Yahoo! (NASDAQ: YHOO  ) , and China Mobile (NYSE: CHL  ) .

However, not all tech stocks are created equal. Let's take a look at each of these stocks individually and see if it makes sense to buy in at these levels as the new year begins. 

Apple

Year-to-Date Stock Return

25.02%

P/E

11.54

Dividend Yield

2.10%

1-Year Revenue Growth (YTD)

44.60%

1-Year Profit Growth

61%

CAPS Rating (out of 5)

***

Sources: Motley Fool CAPS and Yahoo! Finance.

Apple is currently the most valuable brand in the world, with more than $120 billion in cash and cash-equivalents.

Yet, Cupertino has been getting slammed by analysts lately for everything from Apple Maps to iPhone 5 supply issues, as well as worries over the fiscal cliff. It's as if Apple has taken all the sins of the financial world on its shoulders. Despite the doom and gloom, Apple still rules the roost. Not only did the iPad product line dominate Christmas wish lists in 2012, but according to online advertising and data analytics firm Chitika, iPad users are by far the most prolific consumers of the Internet. For every 100 page views on an iPad, a Kindle gets about five, a Galaxy gets about three, and a Surface gets 0.22. 

Recommendation: Hand-wringing over the "what-ifs" is what analysts get paid for. However, the only thing that really matters is how Apple's next earnings call pans out. Look for the bulls to snatch the narrative back from the bears if Apple beats its conservative forward guidance on Jan. 22. 

Intel 

Year-to-Date Stock Return

(10.98)

P/E

8.83

Dividend Yield

4.40%

1-Year Revenue Growth (YTD)

23.80%

1-Year Profit Growth

(13.47)

CAPS Rating (out of 5)

****

Sources: Motley Fool CAPS and Yahoo! Finance.

Unless you've been living in a fallout shelter for the past two years, you've probably heard all about the "death of the PC" and how everyone from children to grandma is switching to mobile. Intel's fortunes are (for the moment, at least) directly tied to the fate of the PC platform, and Intel's share price has suffered accordingly. 

However, for all their popularity, the reality is that Apple flagship products -- the iPad and the iPhone -- are still largely consumption-driven devices, with very little room for personal and enterprise-level productivity. PCs themselves are undergoing a metamorphosis that could potentially undermine tablet sales.

The PC touchscreen-based laptops and "convertibles" -- touchscreen laptop/tablet hybrids like the Surface -- are set to flood the market in 2013, potentially giving the PC platform a shot in the arm, and restoring at least part of Intel's lost glory in the process. 

Recommendation: Despite the attractive entry point at $20 per share and Intel's game-changing Rosepoint Wi-Fi system on chip technology on the horizon, I believe that 2013 will mark a transition phase for Intel. I'm waiting for continued weakness and macro uncertainty to depress shares of Intel to around $17 before buying in. 

Yahoo!

Year-to-Date Stock Return

19.71%

P/E

5.90

Dividend Yield

N/A

1-Year Revenue Growth (YTD)

(21.20%)

1-Year Profit Growth

28.31%

CAPS Rating (out of 5)

**

Sources: Motley Fool CAPS and Yahoo! Finance. N/A = not applicable; Yahoo! doesn't pay a dividend.

I've been touting Yahoo!'s stock since Marissa Mayer's appointment to CEO was confirmed back in July. While the stock isn't the grand slam it was at $15, Yahoo! is still significantly underpriced, given its 700 million monthly active users and ultra-low P/E. Mayer is focusing on a redesign of Yahoo!'s front page for 2013 as well as rounding out Yahoo's talent pool with a series of relatively low-cost aqui-hires

Recommendation: Yahoo! has one of the best risk/reward profiles in tech today. More important for investors, the company is committed to a $3.6 billion share buyback in 2013, implying a 40% increase in shareholder value. 

China Mobile 

Year-to-Date Stock Return

23.57%

P/E

11.84

Dividend Yield

3.4%

1-Year Revenue Growth (YTD)

13.90

1-Year Profit Growth

10.20%

CAPS Rating (out of 5)

****

Sources: Motley Fool CAPS and China Mobile.

China Mobile is the largest mobile carrier in the world, with more than 700 million subscribers. The company almost has as much net cash on hand as AT&T has net debt. To top it all off, Apple is practically on its knees begging for a deal with the company.
What's not to like? Well, China Mobile's 1.5% year-over-year increase in net profit doesn't reflect the growth of the Chinese economy.  
 
While China Mobile controls 70% of the overall Chinese market, the company still runs on its own proprietary 2G GPRS service. Its 3G network likewise runs on a home-grown network standard, known as TD-SCDMA. 
 
Worse, it's got a future of declining market share to look forward to, while rivals China Telecom and China Unicom are profiting handsomely from their 3G services.
 

Source: Fellow Fool Evan Niu's "2012: Visualizing iPhone Growth Opportunities in China."

43.35% of China Mobile's new subscribers are signing up for the low-margin 3G service, which means that in all likelihood, China Mobile will continue to suffer from margin compression, whether the company updates its creaky mobile network infrastructure or not.
 

Source: China Mobile (link opens PDF).

Recommendation: Numbers are easy to fall in love with. Alas, like love, raw facts and figures can be misleading when taken out of context. China Mobile's 700-million-plus subscribers are largely located in the rural areas, rather than the more affluent Chinese coast, making it seem likely to me that over 600 million of China Mobile's subscribers will never own an iPhone, Samsung Galaxy, or Nokia Lumia -- not because they're not interested, but simply because they can't afford it. I'm calling China Mobile a hold today.

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  • Report this Comment On January 03, 2013, at 4:55 PM, TheRealRacc wrote:

    An article on Tech Stocks, that leads with Apple...

    I came to the conclusion, after much hoopla on AAPL performance, that Apple is not a tech stock. So I chose to disregard all analysis which tries to force the square peg into the round hole.

    Can someone please provide an argument why Apple is a tech stock? More specifically, can you tell me why Apple should be lumped with other tech stocks like Microsoft, IBM, CSCO, etc.?

    Apple is, in reality, a consumer product stock. It doesn't create technology, it just uses it to make a product.

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