3 Stocks to Buy in Technology

Take-Two Interactive, Baozun, and Baidu trade well off their recent highs and offer big upside for long-term investors.

Keith Noonan
Keith Noonan
Feb 27, 2019 at 10:17PM
Technology and Telecom

When it comes to companies that have strong growth potential and scalable businesses capable of bringing in great returns, there's no shortage of candidates in the tech sector.

For this dive into appealing technology stocks, I've identified two Chinese internet companies and one American video-game publisher that have what it takes to deliver strong returns for your portfolio. Read on to see why Take-Two Interactive (NASDAQ:TTWO)Baozun (NASDAQ:BZUN), and Baidu (NASDAQ:BIDU) are three worthwhile companies that trade at significant discounts and have the potential to deliver huge returns for shareholders.  

Check out the latest Baidu, Take-Two, Baozun, and iQiyi earnings call transcripts.

Four arrows in front of charts.

Image source: Getty Images.

An unfairly punished video game publisher

The video game industry has shifted over the last decade, moving to digital sales channels and prioritizing in-game monetization -- trends that have generally benefited publishers. Take-Two Interactive's hit game Grand Theft Auto V is a title that exemplifies the shift. The game's online multiplayer mode has been enormously profitable for the publisher, and has helped to keep the player base active even though the game was first released in 2013. This focus on new online gameplay experiences for post-release downloadable content has made the company's earnings much stronger and more dependable, as well as significantly expanding its market share.

Now, on the heels of the hugely successful GTA V, Take-Two has launched Red Dead Redemption 2. The sequel in its western is off to a start that's worth celebrating. It's shipped more than 23 million copies just a few months after release -- trouncing analyst targets that pegged the game's lifetime sales at between 15 million and 20 million. And yet, Take-Two's stock has languished, trading down roughly 37.5% from its 52-week high. 

Underperformance for some key releases from competitors including Activision Blizzard and Electronic Arts, new regulatory roadblocks to growth in China, and questions about the growth outlook for in-game purchases have led to a more somber outlook for video game stocks. These concerns have also been magnified by the breakthrough success of another game -- the massively popular and free-to-play Fortnite -- causing some investors to worry that the video game industry is on course for collapse.

That remains unlikely, and the recent turbulence presents an opportunity to establish or increase a position in Take-Two. The company continues to deliver strong performance, its core franchises look stronger than ever, and it's worth taking advantage of a sell-off that has more to do with rough patches for its competitors.  

A Chinese e-commerce specialist

Baozun is another company with a promising business that's posted big stock gains over the last several years but has recently hit some turbulence. As with Take-Two, the dynamics that have dragged shares lower should not be ignored, but the big sell-offs have created opportunities for investors who are willing to weather volatility in pursuit of market-crushing returns.

Baozun shares climbed as high as $67 last summer, but investors can now snag a stake in the company's future at $37 per share -- or roughly 25 times the year's expected earnings. That's a proposition that's worth taking. The biggest snags for Baozun stock over the last year have had to do with the slowing growth outlook for the Chinese economy and concerns about the country's shaky U.S. trade relationship. The e-commerce company specializes in helping major Western brands quickly enter and scale up in China's hot online retail market, and the possibility that the trade situation will put a big dent in business still appears to be affecting the stock. 

Baozun is a provider of one-stop-shopping e-commerce solutions, offering website creation, customer management, and marketing services. The company also provides warehousing and order fulfillment, though it's gradually moving away from these as it prioritizes its higher-margin software and services business.

It's reasonable to expect that Baozun's growth trajectory will be uneven, but the company's long-term potential should be attractive for investors seeking exposure to the Chinese e-commerce space. The short-term outlook also does not show any impending destabilization. Management expects that revenue growth for the company's services segment in the December quarter will come in ahead of the 40% to 45% growth target that it has for gross merchandise sales growth on its platform, potentially indicating that the company has raised its prices and suggesting strong momentum for its services segment. 

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A cheap play in China's big tech trends

Baidu reported fourth-quarter earnings in conjunction with its streaming video spinoff iQiyi (NASDAQ:IQ) after market close on Feb. 21. I purchased more shares in the Chinese search giant after the stock sold off post-earnings and plan to continue adding to my position at current price levels. While Baidu's net income fell 22% year over year in the fourth quarter because the company has to absorb losses from iQiyi, the divergent paths the two stocks took after earnings has made the parent company's shares even more attractive. 

While Baidu stock has sunk roughly 6% post-earnings, iQiyi stock has rallied 20%. An investment in Baidu is also an investment in iQiyi, and this means that it's possible to build a position in the streaming video company indirectly at a price that's cheaper than before the earnings and guidance the spurred iQiyi's big gains. Such a move might not make sense if Baidu's core growth engines were in trouble, but that doesn't appear to be the case, and the stock is off more than 40% from the high it hit last summer. 

Not counting businesses that it's divesting from, Baidu's core segment grew sales 20% year over year. Its overall business with iQiyi factored in grew 28% annually. The company retains a roughly 60% stake in the streaming video offshoot, and it looks like Baidu is getting punished for its spinoff's operating losses but not fully feeling the benefits of the unit's impressive sales growth. 

Baidu is consistently profitable, and its stock trades at roughly 18 times this year's expected earnings. That valuation looks cheap in historical context, and it presents a worthwhile buying opportunity for a company that's at the forefront of trends like digital advertising growth, artificial intelligence, and the rise of streaming media distribution.