Five promising tech stocks you may have overlooked

 

In a late bull market, the biggest gains always seem to come from the tech sector, and yet, these great gains that so attract us also cause us to recoil in visceral shock at some of the valuations these stocks achieve. Everyone knows, for example, that Square (SQ) is an extremely promising stock. (You’ve been hearing it in this column, among other places, since shortly after its IPO.) But is it reasonable to buy stock in an unprofitable company trading at 91 times its projected 2019 earnings? And if not, does that mean it is reasonable to sell the stock, possibly to buy it back later at a more reasonable valuation? Alas, there’s simply no way of knowing the correct answer to either of these questions.

That’s why today we are going to focus on promising tech companies that have thus far evaded market insanity. That’s not to say they are cheap, because no promising company’s stock is cheap at this stage of a bull market, only that they haven’t yet been fully dragged away by the hype train.

Remember to treat these ideas as just that, ideas, and do your own research before making any investment decision.

Microchip Technology Incorporated (MCHP)

Microprocessor companies are still not trading at the same crazy valuations as are software companies, which is odd. Investors are wary of the admittedly unpredictable chip market, but less wary of the even more unpredictable software market. In recent weeks, I’ve pointed to Taiwan Semiconductor (TSM), and Xilinx (XLNX) as stocks that seemed curiously cheap. Today, I’m looking at Microchip Technology Incorporated, a company with a name so forgettable, it must surely be so by design. As you might guess, this company doesn’t sell to consumers, but to manufacturers of electronic devices. You can find its microcontrollers in automotive networking, computing, lighting, power supplies, motor control, human machine interface, security, wired connectivity, and wireless connectivity products. As for valuation, trailing P/E is a lofty 94, but forecast forward P/E is an enticing 13, which indicates not only good value, but also a furious rate of growth.

Chart courtesy of www.stockcharts.com

Digital Realty Trust (DLR)

As you might guess from its name, Digital Realty Trust is a Real Estate Investment Trust, or REIT, meaning it derives its revenue from owning real estate. It is still a tech company, though, because it owns data centers, and offers cloud computing solutions to customers, including hybrid- and multi-cloud solutions. The company first went public back in 2013 and is now worth $25 billion. Shares of DLR are trading at $122, up from $77 at the beginning of the year. If you believe the rapid increase in the number of and demand for data centers seen in the past few years is a statistical blip, you should stay away from this one, but if you see it as part of a new and emerging technology paradigm that will continue to grow rapidly, you might want to buy before shares shoot up another 50%.

Chart courtesy of www.stockcharts.com

PayPal (PYPL)

PayPal is a successful company with a market cap of almost exactly $100 billion, but as it is expanding in multiple directions at present, it seems likely that it is still at the beginning of its growth spurt. PayPal continues to increase merchant adoption, consumer adoption, expansion outside the US, and adoption across multiple platforms and devices. The exception point being that in terms of revenue growth, these factors are all multiplicative with each other. The company earned $1.47 per share in 2017 and analysts are forecasting earnings of $2.35 in 2018 with two quarters left to report. If they hit that number, that’s a 60% year over year profit increase. That makes its valuations (t P/E: 51.4, f P/E: 30.5) look attractively low. (Disclosure: I own shares of PYPL in my own account.)

Chart courtesy of www.stockcharts.com

JD.com (JD)

JD is an online retailer in China. It is growing rapidly, with 33% quarterly yoy revenue growth and it’s already very big, with a gross profit last year of $27.3 billion—higher than Amazon.com\s gross profit in 2014. It has long operated near, but not over the threshold of profitability, much as Amazon.com did, and like Amazon.com, it controls its own fulfilment, leading the world in adoption of drone delivery. In other words, this company could well be as big as Amazon.com in three to four years, but unlike Amazon.com, it will not, at that point, have saturated its primary market. If that makes it seem a little nuts to you that JD.com currently trades with a market cap of $52 billion while Amazon’s is 18 times as high, you are not alone. (Disclosure: I own JD shares in my portfolio, and very well may increase my stake within the next 30 days.)

Chart courtesy of www.stockcharts.com

eBay (EBAY)

There’s no question that eBay has stumbled this year. Its quarterly revenue growth is a mere 9.1%—high, but not high like the market wanted it to be high. The general consensus on eBay seems to be that the company lost its mojo after selling PayPal, and while it did give up a potentially powerful growth engine, I believe its rationale for doing so was sound. Having fallen behind in mobile adoption, the company knew it would have to spend aggressively to catch up. This is now happening, but it may take a few years before we know whether that effort has been successful. In the meantime, the company has a projected forward P/E of 13. That seems low at present, so if the company begins posting solid earnings growth over the next two years, as analysts are predicting, shares should enjoy a very strong rally.

Chart courtesy of www.stockcharts.com

Symbols: DLR EBAY JD MCHP PYPL
Julian Close

Julian Close

Julian Close became a stockbroker in 1995. In his 20 years of market experience, he has seen all market conditions and written about every aspect of investing. Julian has also written extensively on corporate best practices and even written reports for the United Nations. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.

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