Of the 11 sectors covered by S&PCapital IQ , only one is
on track for lower profits in 2013: technology.
Theprofit anemia stems from severalfactors , including:
- Extremely low levels of government spending due to the
- Depressedsales activity in Europe. The tech sector has more
exposure to Europe than any other sector.
- A lack of any hot new products or trends to trigger
interest among buyers.
Yet as we've noted many times, several tech firms are sitting
on stunning levels ofcash .
Cisco Systems (Nasdaq: CSCO)
Microsoft (Nasdaq: MSFT)
Oracle (Nasdaq: ORCL)
and others may have a hard time generating organic growth, but
they have a long track record of acquisitions to help get the
Though it's unwise to buy astock simply because you suspect it
is abuyout candidate, you can't ignore a company's appeal in
amerger andacquisition (M&A) scenario if it has a strong base
of technology or an impressive customer list. And you surely need
to pay attention if that stock has recently traded sharply lower,
creating more compelling valuations for a potential buyer -- or
simply on a stand-alonebasis .
Here are two slumping techstocks that now hold solid value in
light of their considerable growth prospects andmarket
|Palo Alto Networks
Palo Alto Networks (
has arguably the most comprehensive suite of network
security system capabilities, helping companies and
governments operate their servers without malware, spoofing
and other gremlins that can cripple a company's networks.
Palo Alto's major clients include
Splunk (Nasdaq: SPLK)
Citrix Systems (Nasdaq: CTXS)
Aruba Networks (Nasdaq: ARUN)
Ericsson (Nasdaq: ERIC)
||Palo Alto Networks specializes in computer
network security for companies and governments.
Those partnerships have helped fuel triple-digit annual
sales growth for five straight years, and sales are on
track to rise another 50% thisyear to around $400 million.
Still, the "laws of bigness" are starting to kick in and
sales growth could slip below 40%. Slowing growth may
explain why this stock has suddenly fallen out of
Another explanation for falling shares: Management has
decided to sharply boost headcount (from a recent 950 to
roughly 1,400 a year from now) to help keep sales growth
above 35% for the foreseeable future. That hiring spree is
eating into near-term profits.
Right now, Palo Alto is the fourth-largest network
security firm behind Cisco,
Juniper Networks (
Check Point Software Technologies (Nasdaq:
. However, other companies involved in network management
-- such as Microsoft,
-- have reportedly been eyeing the security niche in recent
years, thanks to its robust growth prospects. Palo Alto
Networks would quickly make them one of the leading
securityvendors interms of software
Analysts at JMP Securities "believe Palo Alto leverages
significant technology advantages in the
next-generationfirewall market," and they seeshares
rebounding toward a $60price target .
||Fusion-io offers a line of computer hardware
components aimed at consumers and businesses.
I have written about
several times in the past (and you can always read about
any stocks we cover by typing theticker symbol into our
search box), and I've repeatedly takennote of the
company's radical and game-changing approach to data
Trouble is, management was never able to clearly
articulate the company's approach. Analysts at Lazard
noted: "To some, FIO is a componentvendor , a business
based on PCIe-based flash cards thatwill
inevitablycommoditize . Others correctly point out that
FIO boasts a unique software portfolio, but we believe
many are oblivious as to what the strategy and value
proposition of FIO's software portfolio really is. While
we all have our view, we believe there may have been an
identity crisis within the company itself." Those
analysts see shares rising to $23.
That confusion has led to a shake-up in management and
a 55% drop in the stock from the52-week high . Yet even
with that turmoil, this is still a fast-growing business.
Sales shot up from $36 million in fiscal 2010 to $359
million in fiscal 2012, and analysts see that figure
exceeding $550 million in Fusion-io's currentfiscal year
, which began this week.
As is the case with Palo Alto Networks, Fusion-io
isinvesting heavily to handle the next leg of growth,
which is dampening profits. That's a real turn-off for
myopic investors, but crucial if this company is to
eventually meet its goal of $1 billion in annual sales.
At a minimum, it's a necessary effort to ensure that this
business realizes its full potential if new management
decides toput the company up forsale .
Risks to Consider:
Never buy a stock solely on the basis of buyout hopes.
Instead, look at possible M&A activity as a potentialcatalyst
Action to Take -->
It's hardly a bold move to predict that we will see major
transactions in the technology sector in the second half of this
year. Deal-making is the lifeblood of this sector, and cash-rich
balance sheets, along with an anemic top-line organic growth, set
the stage for more deals. Whichever tech stock you are
researching, analyze them in the context of the broader
landscape. Do the companies you're looking at have the right
products or customerbases that would hold appeal to bigger
players? Those traits have been markers for success in the