The tech sector is a volatile place, but investors who pick the right stocks can sometimes benefit from outsized returns. Of course, this also means that some stocks plummet. While this can happen in any sector, tech often sees the most volatility. Case in point: Salesforce (NYSE:CRM) and Qualcomm (NASDAQ:QCOM). In the past twelve months, both stocks have seen big moves, but in opposite directions: Salesforce has shot up about 34% while Qualcomm has declined 18%.
These two stocks serve as good examples of two bets for investors that could move in opposite directions. Find out why investors should avoid Qualcomm and buy Salesforce.
Too much uncertainty
A quick glance at a few valuation metrics might make Qualcomm look like an excellent stock to buy. Since the company has a near-monopoly in its wireless technology niche, collects royalties from almost all 3G and 4G mobile phones globally, and owns the bulk of critical intellectual property for these networks, its price-to-earnings ratio of just under 20 seems compelling, if not downright cheap. Mix in a meaty 4.4% dividend yield and the stock begins to look exceptionally attractive.
Here's the thing: The stock could very well prove to be an outperformer, allowing investors who buy it today not only to rake in a nice dividend yield, but also to see the stock price soar. However, high-profile litigation from Apple, scrutiny from several influential regulatory bodies in different regions, and the loss of some business from major customers amid these troubles all breed uncertainty about Qualcomm's future.
Furthermore, in the near term, these challenges are weighing on results. Qualcomm's fiscal 2017 third-quarter revenue fell 11% year over year. And during the same period, net income declined 40%.
Sure, Qualcomm could eventually come out ahead. But investors may want to steer clear of this tech company until there's more certainty about how its business can manage these headwinds over the long haul. For now, Qualcomm's underlying licensing business model is threatened, making the future simply too risky.
This winner looks poised to keep winning
Salesforce, on the other hand, looks positioned to continue delivering more of the same expectation-beating results it has been serving investors for years. The enterprise cloud company is firing on all cylinders, as customers gobble up its unrivaled SaaS (software as a service) CRM (customer relationship management) platform offering.
Highlighting the company's impressive recent growth, Salesforce management has had to revisit its full-year revenue guidance for fiscal 2018 for three quarters in a row, bumping it higher each time. And with unprecedented scale as the world's largest pure-play SaaS platform, Salesforce's competitive advantages are only increasing, making its service increasingly compelling.
Looking ahead, management continues to expect strong growth, projecting full-year revenue and operating cash flow for fiscal 2018 (the current fiscal year) to rise 23% to 24% and 20% to 21% year over year, respectively.
Of course, Salesforce investors won't get to buy into this growth story without paying a premium. The stock has a price-to-sales ratio of 7.2, well above the software-application industry average of 5.7. Also keep in mind that though Salesforce is on its way to regularly reporting profits, it's not there yet. So investors buying Salesforce are betting that meaningful earnings will materialize in the coming years.
Both stocks could prove to be volatile in the near term, and even over the next few years. But looking out five years or more, I think Salesforce's fast-growing business and dominant position in the cloud make it more likely to outperform the market.