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2 Tech Stocks to Watch in July

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Apple (NASDAQ: AAPL  ) and Google (NASDAQ: GOOGL  ) will both be hot tech stocks to watch in July. Google, at $880 per share, trades near its 52-week high of $920. The $1,000 price target that used to be fair for Apple is now a realistic target for Google. Apple, however, continues to dive deeper into value territory. With both companies reporting earnings in July, there could be some major volatility with these stocks.

Last year Cupertino's tech giant refreshed its iPad, which accounts for about 20% of the company's revenue. The refresh undoubtedly helped boost the company's sales. This year, however, Apple's third quarter has been unusually silent. Other than a MacBook Air refresh, the company hasn't yet released any new products. The company appears to be telling customers to be patient for new products with its new marketing push that says "it takes time."

Without another new product, Apple will almost certainly deliver a year-over-year decline in earnings and flat revenue. Analysts, on average, are expecting EPS of $7.32 and revenue of $35.15 billion for the current quarter. In the third quarter of 2012, Apple reported EPS and revenue of $9.32 and $35.02 billion, respectively.

Investors should watch for two things in particular:

  • Gross margin. With Apple guiding for gross margin between 36% and 37% for the current quarter, it could be the lowest the company has reported in years. If Apple doesn't surprise on the upside in profitability, investors may begin to question how long the company can maintain its current levels of profitability.

  • A sell-off. If a disappointing gross margin or some other factor sends the stock lower, it might be a great time to pick up some shares. At less than 10 times earnings, tough times are already priced into the stock. A cheaper stock means an even better dividend yield (already above 3%), and this cash cow should continue to pay out handsome dividends for a very long time.

The world's dominant search engine faces a very different set of issues. At 26 times earnings, the valuation is getting a bit lofty.

Last quarter, quarterly advertising revenues excluding payments to publisher partners increased 16% from the year-ago quarter. Operating income growth, however, was less robust, growing just 11% from the year-ago quarter. The disconnect between revenue growth and operating income is expected, as the company's revenue mix continues to shift away from its core search business on desktop to lower-margin, mobile computing.

The major reason for the decline in Google's advertising profitability is the higher traffic acquisition costs associated with the fiercely competitive mobile environment.

The key areas for investors to watch are traffic acquisition costs and revenue growth.

Last quarter, traffic acquisition costs increased to 7.9% of revenues generated from Google properties versus 6.4% in the year-ago quarter. Though a sequential increase is acceptable as Google's ad revenue continues to shift to mobile, a significant jump could have investors worried.

With such a lofty valuation, investors should hope that Google maintains 16% or greater revenue growth in advertising revenues. A surprise on either the upside or downside could cause some volatility in the stock price.

What do you think?
As leaders in their respective markets, Apple and Google are tech stocks to watch anytime they report earnings. But with Apple getting very cheap and Google becoming increasingly expensive, the earnings showdown between the two is starting to get a bit more interesting.

Has Apple's gross margin bottomed out? Will it beat estimates?

Can Google maintain its impressive revenue growth? When will the increases in traffic acquisition costs stop?

Let us know what you think by leaving a comment.

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