5 Tech Stocks that are More Expensive than Apple and Google
The largest players in the technology space garner the lion’s share of attention. Investors are obsessed with Apple (Nasdaq: AAPL), as are consumers who have shifted from snapping up iPods to iPhones and the newest iPad device. Google (Nasdaq: GOOG) is the other big name that draws attention with its dominance of the Internet search business and its Android smartphones.
As a result, investors have historically rewarded these stocks with rich multiples. Reception issues over the newest iPhones have sent Apple shares down a bit and now trade at a forward multiple of about 18. Google trades at a slightly higher 18.5 times forward .
The downward trends in the multiples for Apple and Google reflect uncertainty about their future sales and profit trends. But what about other tech stocks trading at richer valuations? Do they have something up their sleeve that will propel growth and generate outsized returns for shareholders? Or is it just smoke and mirrors?
On a forward P/E basis, the five firms below are anything but bargains and are priced much more richly than the larger rivals they aspire to eventually match. The lofty valuations reflect a combination of their compelling growth prospects, takeover appeal and solid business outlooks.
Blue Nile (Nasdaq: NILE)
Business: Remote Online Jewelry Retailer
Forward P/E Multiple: 47.0
As an online jewelry retailer, Blue Nile’s business is firmly planted between the digital and real world. Its offering of diamonds and fine jewelry is as tangible as any merchandise out there, but its virtual presence is the main reason it can beat rivals on price and is growing very rapidly.
At a forward P/E that is highest of the companies covered in this article, Blue Nile has quite a bit of growth already built into the share price. However, the firm is growing from a small base, as analysts expect sales for the coming year of only $349 million. They project sales will increase +15.5%, which is pretty impressive given consumer spending trends are challenging in the current economic environment. Earnings should exceed $1 per share for the full year.
LogMeIn (Nasdaq: LOGM)
Business: Remote IT Connectivity
Forward P/E Multiple: 39.0
A fellow investment writer turned me on to LogMeIn, and I just downloaded the application to be able to print from a laptop in another room from where my desktop computer and printer are located. This is just one of the benefits of being able to obtain remote access to a computer and is one of the first services to offer this to consumers. Of course, the target market is company IT departments that are likely to pay for LogMeIn’s premium remote access service.
The lofty valuation is testament to the company’s rapid growth and expectations for more of the same going forward. LogMeIn was founded in 2003 and went public in July 2009, but sales have grown +50% on average during the past two years and earnings have jumped nearly +200% annually during this limited but impressive timeframe. Analysts are calling for +26.5% sales growth for the current year to $94 million and only slightly lower earnings growth.
Advent (Nasdaq: ADVS)
Business: Remote Financial Software
Forward P/E Multiple: 37.5
Stock market volatility during the past couple of years has resulted in a backlash against investment brokers and advisors at big financial institutions. Advent is only encouraging this trend by offering software to help independent investment managers run their books from home or on the go. This includes the nuts-and-bolts of managing portfolios, including performance measurement, creating reports and keeping track of trades.
Sales have grown at an +11% annual clip in the past five years and cash flow has been strong — free cash flow was more than $3 per share during the past twelve months. The lofty valuation reflects the firm’s strong cash flow, high customer retention ratio and potential for a larger rival to acquire Advent and its appealing customer base.
Citrix (Nasdaq: CTXS)
Business: Virtual Desktop Solutions
Forward P/E Multiple: 30.5
Citrix is one of LogMeIn’s competitors the former of which is a more established firm offering virtual operating systems and is targeting business customers to keep growth chugging along. The company also offers the popular GoToMeeting service that lets individuals offer online presentations to remote colleagues or clients.
Analysts expect sales to grow more than +13% for the full year, reaching nearly $2 billion, while earnings are expected to hit close to $2 a share. Citrix’s valuation looks lofty, but it reflects takeover potential from a larger rival and pales in comparison to archrival VMWare’s (NYSE: VMW) insane forward multiple of 57.
Informatica (Nasdaq: INFA)
Business: Enterprise Data Software and Solutions
Forward P/E Multiple: 29.0
Informatica has a reputation for some of the most technologically advanced solutions to help firms mine their databases for valuable sales tracking and information organization. An explosion in digital databases is expected to continue and is a primary reason analysts expect sales to grow another +24.3% this year to $623 million.
Informatica will continue to do well as long as top-line growth continues to be robust. It also maintains partnerships with larger firms that use its software, though these also count as rivals that could actually end up acquiring the firm.
Action to Take –> It’s hard to argue against market leaders like Apple and Google trading at decent valuations, but stretching into higher-priced names that are more nimble and growing at a quick rate also has its appeal. Blue Nile and LogMeIn stand out for their robust sales expectations, while Informatica has appeal given its software is considered best-in-class. The others offer a mix of growth and takeover appeal and are solid grounds for further bottom-up research.