Investors should always understand the businesses of the stocks they consider buying. But when it comes to tech companies, the task can look intimidating because of the specific knowledge involved. Some companies are easier to understand than you may think, though. In fact, you most likely use their products or services every day without knowing it. Here are three such stocks.
1. Cisco Systems: Because you use the internet
Cisco Systems (CSCO 0.41%) offers products, software, and services mostly to enterprises, service providers, and public organizations to build their computing networks.
While the tech giant doesn't sell its networking devices to consumers, you're probably using Cisco products right now. This article is hosted on a remote server, and networking devices, called routers, route electric signals across the world to deliver this article to your computer or phone.
Market research company Dell'Oro Group indicated Cisco regained its leadership as a core router vendor for service providers in Q1 2019. The company grew its revenue by only 5% to $51.9 billion last year, but thanks to its strong free cash flow that reached $14.9 billion, it pays a safe dividend that currently yields 3.5%.
With cash, cash equivalents, and investments that exceeded total debt by $11.1 billion at the end of last quarter, and with a reasonable forward P/E ratio of 13.2, prudent dividend-oriented investors should consider buying Cisco stock.
2. Arista Networks: Because you are a Facebook user or a Microsoft customer
Arista Networks (ANET 0.45%) competes with Cisco, but its service provider segment remains modest. First-quarter total revenue reached $520 million, and management indicated during the last earnings call that service providers represented only about 25% of the company's business.
In fact, you are likely to use Arista products when you access Facebook's applications and websites or when you use Microsoft's cloud-based products such as Office 365 and Azure.
Last year, Arista collaborated with Facebook to offer network devices that support Facebook's network operating system. In Arista's fourth-quarter conference call, the company reported that Microsoft and Facebook represented 23% and 16.6% of Arista's total revenue in 2019, respectively. And Microsoft and Arista have been working closely to build Microsoft's cloud data centers. The companies announced a few days ago a deeper integration between Microsoft's network operating software SONiC and Arista's networking products.
Arista's concentrated customers represent a risky exposure to the growing cloud data center market. But they also allow the company to minimize its sales and marketing expenses (8.8% of revenue during the last quarter) and generate attractive operating profits (28.6% during the last quarter). However, despite its cash balance of $2.6 billion with no debt, this tech stock doesn't look like a bargain with its forward price-to-earnings (P/E) ratio of 25.6.
3. Limelight Networks: Because you watch video streaming
Limelight Networks' (EGIO) solutions improve the performance and availability of internet services thanks to the data centers it has built around the world to host data closer to the users and reduce the traffic load on the internet.
The company's infrastructure also alleviates the burst of traffic that companies can experience when many people access their internet services at the same time, like when tickets for an event go on sale.
Limelight sells its services to companies that deliver online resources you can access at any time. You are likely to benefit from Limelight infrastructure without knowing it when you use resource-intensive internet services such as video streaming.
Given its modest revenue, which increased to $57 million last quarter, up 32% year over year, the company hasn't scaled yet to become profitable. During the last quarter, net losses reached $5.2 million. And because of significant investments to build data centers, management forecast net income to remain negative or break even this year.