by Tom Taulli | June 22, 2012 1:52 pm
There’s certainly a heap of tech stocks that deserve to sell at dirt-cheap valuations — think crumbling firms like Research In Motion (NASDAQ:RIMM[1]) and Nokia (NYSE:NOK[2]).
Still, there’s a few others out there with solid businesses that are just getting the short end of the confidence stick by investors. Three in particular stand out right now:
Even after a nice rally for Microsoft (NASDAQ:MSFT[3]) this year — MSFT shares are up 12% year-to-date — the stock’s valuation still remains low. MSFT currently is trading at about 11 times trailing earnings, and just 10 times expected 2013 earnings of about $3.09 per share.
Sure, Microsoft faces some serious challenges. Its smartphone business and pairing with Nokia (NYSE:NOK[2]) has been a miserable failure to date, and the company’s Internet business has seen much of the same.
Still, Microsoft has several franchise businesses — Windows, Office, the Xbox video game console and its server division — in its pocket. They generate huge amounts of cash flows, which came to nearly $27 billion during the past year. As a result, Microsoft continues to buy back stock, and MSFT is able to throw off an attractive 2.6% dividend yield.
But Microsoft also has promising future prospects in the form of its recently unveiled Surface tablet[4]. A big potential key to its success are its keyboard and stand, which are seamlessly integrated into the device. And should the Surface also feature a usable version of Office, it could get lots of traction with corporate customers.
While Oracle‘s (NASDAQ:ORCL[5]) P/E ratio of around 14 times earnings is somewhat on the moderate side, its forward P/E of 10 times fiscal 2014 earnings is a bit more palatable, and the company also is selling at a low cash flow multiple of about 7X.
Oracle faces significant headwinds, which include the slowing global economy (affecting everyone else) and the ailing hardware business (more specific to Oracle’s part of the world).
But the good news is that the bulk of the company’s revenues come from mission-critical software like databases and middleware.
With its huge cash flows, Oracle also has been putting the money to work with savvy acquisitions. For example, it has shelled out about $4 billion for cloud-based operators like Vitrue, Taleo and RightNow Technologies. And its database business is crucial for many cloud-based operators, including Salesforce.com (NYSE:CRM[6]).
The cloud computing industry looks poised for a long-term growth ramp, so Oracle should be positioned nicely.
Intel (NASDAQ:INTC[7]) has an attractive P/E of 11 and a better-looking forward P/E of 10 — and a 3% dividend that should attract long-term investors. And yet, INTC’s returns of about 10% this year have been positive, but certainly not explosive. So what can get INTC’s stock price back into gear?
Intel has been moving into the software industry, especially in the security space. A key acquisition was for antivirus/firewall/encryption provider McAfee. Similar deals likely are in Intel’s future, so that should help boost margins.
While Intel has missed the mobile megatrend, the company should eventually be able to get a meaningful piece of the market. The pipeline for new chips is promising, and Intel processors now will be used in the pro version of Microsoft’s Surface tablet[8].
The company also has an extensive global footprint — a huge competitive advantage. So once it starts to get traction in the mobile space, INTC should enjoy a nice spurt in growth.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of the upcoming book How to Create the Next Facebook: Seeing Your Startup Through, from Idea to IPO[9]. Follow him on Twitter at @ttaulli[10] or reach him via email[11]. As of this writing, he did not own a position in any of the aforementioned securities.
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