2 High-Growth Tech Stocks I'm Looking to Buy As the Market Collapses 

Looking to buy the dip? Here are two stocks in high-growth tech companies that I'm looking to pick up from the bargain bin. Before getting into which stocks, though, let's get into why I like them.

Where the growth is
Once upon a time, tech companies were growth companies. Nowadays, tech is a cyclical growth sector -- and, in some cases, just a cyclical sector -- subject to the whims of the economy. That said, within tech there are still growth areas. Thus, no matter what the economic and stock market outlook, these three themes look like good bets for tech investors:

  • Mobile.
  • The cloud.
  • Emerging markets outgrowing developed markets.
  • Business analytics / big data.

Let's make a deal … not
In a weak economy, I want to own stocks in companies that don't need to deeply discount prices to generate sales. In a strong economy, inflation could drive up a company's costs, so I want a company with enough pricing power to protect margins.

What gives a company pricing power?

  • A unique -- or at least superior -- product or service that meets customer needs.
  • Saving customers money.
  • Helping boost a customer's revenue or otherwise making the customer's business more competitive.
  • Becoming a status symbol, particularly with consumers.

Price is no object
Studies show that investors do a good job of identifying companies with superior growth. The studies also show that investors routinely overpay for growth companies, which causes underperformance and even losses. Therefore, if I'm going to pay up for fast-growing company with a sky-high valuation, I want to buy when it's beaten down. Here are two candidates that have topped analyst estimates for at least eight consecutive quarters:

VMware (NYSE: VMW  ) . This is a play on the cloud and is the clear leader in "virtualization," which reduces IT costs by consolidating multiple functions onto one server. VMware also offers software that runs Windows on the increasingly popular Mac computers.

Over the past 12 months, VMware's EPS more than doubled year over year. For 2011, analysts are forecasting revenue growth of 31% and EPS growth of 36%. What's not to like? Well, my Foolish colleague Dan Mock mocked the stocks' former triple-digit P/E ratio. At that level the question was when, not if, the P/E ratio would collapse. That time is now: It was down to 45 times adjusted earnings at Tuesday's close.

ARM Holdings (Nasdaq: ARMH  ) : This company develops and licenses microprocessor technology and is a clear leader in processors for mobile devices. More than 250 semiconductor companies license the company's technology. ARM's licensee list reads like a Who's Who of mobile computing and includes NVIDIA (Nasdaq: NVDA  ) , Qualcomm (Nasdaq: QCOM  ) , Samsung Electronics, Texas Instruments (NYSE: TXN  ) and Apple (Nasdaq: AAPL  ) . My Foolish colleague Tim Beyers asked on June 21 whether ARM might be the next Intel. At the time, he didn't like the company's triple-digit P/E ratio. Me, neither. However, after some drops, its adjusted P/E ratio now stands at a more reasonable 44.

The following tables show how these two stocks stack up versus two tech valuation plays -- Intel and Microsoft -- and two attractively valued tech greats -- Apple and IBM -- that I'm also looking to scoop up from the bargain bin. Note that despite their impressive growth, both VMware and ARM Holdings experienced EPS declines during the Great Recession.

Company

Revenue Growth, 2009

EPS Growth, 2009

Revenue Growth, Past 12 Months

EPS Growth, Past 12 Months

VMware 8% (33%) 38% 110%
ARM Holdings 2% (9%) 27% 39%
Intel (7%) (16%) 18% 30%
Microsoft (3%) (13%) 12% 33%
Apple 14% 34% 76% 90%
IBM (8%) 13% 7% 16%

Sources: Capital IQ (a division of Standard & Poor's), CNBC.

Company

Adjsuted P/E Ratio*

Forward P/E Ratio*

Dividend Yield*

Price*

Consecutive Quarters of Beating Estimates

VMware 44.7 37.7 0.0% $88.17 12
ARM Holdings 44.3 38.9 0.6% $24.66 8
Intel 9.3 8.6 4.1% $20.60 8
Microsoft 9.7 8.9 2.5% $25.58 8
Apple 14.0 11.4 0.0% $374.01 At least 15
IBM 13.7 12.2 1.8% $170.61 At least 14

Sources: Capital IQ (a division of Standard & Poor's), CNBC.
*P/E ratios, dividend yields, and price are as of the market close on Aug. 9, 2011.

Foolish takeaway
Trying to predict the direction of the economy or stock market may be Fool's folly. VMware and ARM Holdings appear poised to outperform the market over the next few years no matter what the future holds. For investors willing to pay up for high-growth companies and able to ride out economic downturns, this is an opportunity to get in at relatively low valuations.

What do you think: Will these tech stocks outperform the market? To help you stay abreast of their prospects, The Motley Fool recently introduced a free My Watchlist feature. You can get up-to-date news and analysis by adding these companies to your Watchlist now:

Fool contributor Cindy Johnson owns shares of Microsoft. The Motley Fool owns shares of Qualcomm, Microsoft, Apple, Texas Instruments, Intel, and IBM and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Apple, Microsoft, NVIDIA, VMware, and Intel, creating a bull call spread position in Microsoft and Apple, creating a diagonal call position in Intel, and writing puts in NVIDIA. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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