Stock Market 2008: Information Technology (Part 2)
Posted on February 19th, 2008 by Jim under Sector OutlookYou’ve heard pitches on Apple (NYSE: AAPL) and Corning (NYSE: GLW), now lets continue on with the information technology sector. There are many places to invest around the sector. I am finding increasingly that the big boys like IBM, Microsoft & Google are providing more risk than reward. As investors, we want as high upside potential as possible when matched with low downside risk. Lets find some companies that match our description.
Solar Semiconductor - The Net Fool picks First Solar (NYSE: FSLR)
After doubting the extreme-growth behind solar technology in January 2008, it seems high time we apologized to powerhouse gainers like First Solar. ThinkEquity Partners gave this great stock a one-word classification, “debottlenecking.” After smashing earnings estimates of 53 cents a share with an astonishing 77 cent gain, they appreciated 30% on the day after increasing 2008
guidance. Don’t let this buy-athon scare you away. We thought the solar industry run-up was finished, and were clearly proven wrong. The year-over-year revenue growth of 280% and strength in EPS suggests stronger future earnings power.
Operating efficiency is one of the primary benefits I see from operation in 2008. Costs per watt ($1.12) averages were down 6% on the year, and a negative currency impact from the Euro was almost entirely overshadowed by economical operations in First Solar’s Malaysia plant. Spots for improvement have been identified, and most analysts feel they can bring home the gold. Most notably, the first and second quarter 2008 should prove to show continued growth on track with 2007 appreciation. Solar companies are all trading at attractive premiums when considering growth. With oil on the move upward, it seems that momentum for green energy will 
remain strong. Investors should return to the solar arena with strong earnings and demand in mind.
The Malaysian plant’s revamp may have a negative impact on First Solar’s first quarter earnings in 2008. On the other side of the coin, we expect an increase in production and see operating margins supporting at 30%+ levels. I wouldn’t be surprised at all to see more good news in guidance. We expect their PE and PEG ratios to come more in line with the industry, as the current premium they appear to be trading at is a result of explosive growth over the past year. Execution was flawless in 2007, and with nothing but green lights thus far… First Solar makes for a great long-term growth play.
Infrastructure Tech. - The Net Fool picks Akamai (NYSE: AKAM)
Akamai is alive and well in 2008. After considering them earlier in 2007, they have continued to display strength in their industry. In a recession-trending market, there is a bit of safety surrounding an internet-based firm. There is VERY strong entertainment and media demand across the internet, and Akamai is just the company to deliver the goods. AKAM posted a big jump in profits during the fourth quarter earnings call, which handily beat analyst estimates. After increasing guidance into 2008 with
continued streaming media demand on the net, it is becoming hard to spin this company negatively.
Akamai Technologies has had an amazing run up over the years. Frustrating the bears once again on their last earnings conference, AKAM got a boost off of their 52-week lows. They’ve now extended their streak of sequential revenue and profit growth to 20 consecutive quarters! What’s more, their balance sheet is as healthy as ever; they have once again increased free cash flow to $634m from $566m. With a leading role
in a thriving content-delivery market, analysts such as Canaccord Adams suggest the potential revenue and earnings growth “in excess of 30% for the next several years.”
The valuation of Akamai is contested often by analysts over whether they are cheap or in-line. I believe they are to the cheap side seeing as how the are off about 45% from their 52-week high and are trading with a PEG of 0.7x. I might be tempted to test the waters if they fall under $32. They are trading at a slight premium in price-to-earnings terms, but I feel this is more than merited as they seem to be a confident recession holding in information technology. With price sensitivity expected to fade along with lowering bandwidth costs, it would appear to be Akamai’s market to steer over the next few years.
That’s it for information technology. There are certainly some great stocks to be found in the sector, despite the notion that tech is always more volatile and dangerous than financials, conglomerates and the like. While February is a historically poor season for IT, I wouldn’t mind getting my march shopping done a bit early with a lot of negative sentiment unfairly dragging down perfectly healthy companies.
-The Net Fool
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What’s your take on STP vs. FSLR?
For the rest of you, STP is “Suntech Power,” another solar company. I am not going to endorse one company over the other, as I feel that when a sector is hot… a sector is hot. I see them both performing well, but I cannot honestly put one over the other at this point.
In my research, I considered both of course. I have found over the past few weeks that FSLR is slightly less appreciated by the market, and I feel that this fundamental flaw (on top of increasing 2008-09 guidance) offers a good deal of appreciation for investors.