With the financial media constantly recommending "hot stocks" to buy, it can be tough for investors to narrow down a list of potential investments. This is especially tough in the tech sector, which includes many companies with complex and opaque businesses.
Therefore, investors should first pick an investing style before picking individual stocks. To illustrate that point, I'll highlight three stocks which are considered mature, growth, and speculative plays in the tech sector, and discuss why they could be ideal investments for different kinds of investors.
The mature tech play: Hewlett-Packard
HP (NYSE:HPQ) split with Hewlett-Packard Enterprise in late 2015. HP retained the company's PC, printer, and imaging businesses, and HPE retained the enterprise hardware and software businesses.
The "new" HP is an ideal stock for conservative investors who favor stability and income over big gains. The stock trades at just 12 times earnings, which is lower than its industry average of 13 and the S&P 500's average P/E of 25. It pays a forward dividend yield of 3%, which is much higher than the S&P 500's average yield of 2%.
You might think that PCs and printers are fading away in the age of cloud-based mobile devices, but they're not. HP's Personal Systems (PC) revenue rose 10% annually to $8.2 billion last quarter, as sales of higher-end notebooks and 2-in-1 devices offset flat sales of desktops.
Printing revenues dipped 3% to $4.5 billion, but HP is scaling up that business with its acquisition of Samsung's printing business and the introduction of new mobile printers and large scale 3D printers for enterprise customers. Analysts expect HP's revenue and earnings to rise less than 1% this year, but that growth will likely accelerate as PC sales pick up and its printing business evolves.
The growth play: Weibo
Investors with an appetite for risk who aren't interested in dividends should consider buying shares of Weibo (NASDAQ:WB), China's biggest microblogging network. Weibo is often called the "Twitter (NYSE:TWTR) of China", but it's growing much faster than its Western counterpart.
Weibo's monthly active users (MAUs) rose 33% year-over-year to 313 million last quarter, its advertising and marketing revenues rose 45%, and its total revenues grew 43% to $212 million. That growth was fueled by robust demand for its ads among small to medium-sized companies and the growing popularity of its live video streaming platform. By comparison, Twitter's MAUs rose just 4% annually last quarter as its revenue grew less than 1%.
Unlike Twitter, which is only profitable on a non-GAAP basis, Weibo is profitable by both non-GAAP and GAAP metrics. Non-GAAP net income surged 134% to $77 million, and its GAAP net income rose 125% to $43 million. Analysts expect Weibo's revenue and non-GAAP earnings to respectively grow 51% and 62% this year.
Those numbers sound impressive, but Weibo isn't cheap with a trailing P/E of 106 and a forward P/E of 41. However, those figures actually seem reasonable relative to its past and projected growth rates.
The speculative play: Twilio
Cloud service provider Twilio (NYSE:TWLO) is a speculative play, because it delivers impressive revenue growth with non-existent profits. Twilio's cloud platform handles voice calls, SMS messages, videos, security, and other features for app developers.
Instead of building these services from scratch, developers simply subscribe to Twilio's services to add those features into their apps. Twilio's major customers include Facebook's (NASDAQ:FB) Messenger and WhatsApp, Uber, and Airbnb. Demand for Twilio's services has been surging -- that's why its revenue rose 60% annually to $82 million last year as active customer accounts rose 44% to 36,606. The company expects its revenue to grow another 31%-34% this year.
Twilio could keep growing or become a lucrative acquisition target, but it has a few notable flaws. First, Facebook's WhatsApp and Uber generated about a fifth of its revenue last year, so the loss of either customer would be disastrous. Meanwhile, Twilio hasn't offered investors a clear roadmap toward profitability -- which is troubling because Vonage's Nexmo, which is used by Lyft, offers a potential alternative to Twilio's platform. Lastly, Twilio isn't cheap at 9 times sales -- which makes it a much riskier play than the other two stocks on this list.
The key takeaway
I personally own shares of Weibo and Twilio as growth plays, and I'm thinking about starting a position in HP as an income generating one. These three stocks might not be right for you, but recognizing them as income, growth, and speculative plays might help you understand which type of stock suits your investment goals.