3 Bargains From Tuesday’s Tech Wreck

by Tom Taulli | January 30, 2013 1:22 pm

3 Bargains From Tuesday’s Tech Wreck

Virtualization software company VMware (NYSE:VMW[1]) was among a host of tech stocks that simply got crushed Tuesday.

In VMWare’s case, its 21% loss came on weak guidance for earnings;[2] a few other stocks also fell after discouraging reports, though others were merely falling in sympathy with their sectormates.

But this massive bloodletting did provide us with a few quick bargains in a few otherwise attractive companies. Here are three stocks that look like good deals after Tuesday’s big selloff:

Sourcefire

Jan. 29 Return: -6.9%

Sourcefire (NASDAQ:FIRE[3]) is a top provider of security software. At the core of its technology is an open-source system that it has used since 2001, which has allowed for low-cost development.

While VMware isn’t exactly in the same line of business as Sourcefire, its report might have had a bit to do with FIRE’s decline (as well as an additional 3% discount Wednesday). VMware blamed weak guidance on a drop-off in federal government orders — and that’s where Sourcefire gets a big chunk of its own business.

However, Sourcefire might not feel the same amount of pressure on that front. Security is one of the U.S. government’s highest priorities, with cyberspace becoming one if its most prominent battlefields. Ergo, it’s unlikely we’ll see the same big cutbacks in security software that we’ve seen in other areas.

Sourcefire itself continues to grow at a decent rate, with Q3 revenues of $58.8 million coming in 30% higher than the year-ago period. FIRE reports Q4 earnings after the bell Feb. 21.

Seagate Technology

Jan. 29 Return: -9.4%

True, storage maker Seagate Technology (NASDAQ:STX[4]) did post disappointing guidance[5] for the fiscal third quarter, with a revenue forecast of $3.25 billion to $3.45 billion coming in less than Street expectations for $3.48 billion.

However, the investor reaction seems overdone. Seagate continues to benefit from the consolidation in the hard disk market, as it means pricing is relatively stable, which allows for nice cash flows.

True, the industry’s long-term prospects look iffy — especially in light of the decline in PCs. However, Seagate has been smart to invest in next-generation technology. For example, the company recently formed a $40 million venture with Virident Systems to build flash memory products, which are critical for mobile devices.

After Tuesday’s haircut, STX is trading at a meager 4.5 times earnings, and offers a 4.1% dividend to boot.

Zynga

Jan. 29 Return: -8.5%

OK. This might be a bit of a contrarian call. After all, isn’t social gaming becoming passé? Perhaps so. But it’s still a large business, and Zynga (NASDAQ:ZNGA[6]) remains the dominant player in the market with 240 million monthly active users across 175 countries.

It’s possible that some of the losses came amid news that its chief game designer was stepping down, though Tuesday was a bad day for the social sector — including Facebook‘s (NASDAQ:FB[7]) — in general.

ZNGA recently reduced its work force by 5% and eliminated 13 underperforming games — not popular moves, but important cost-cutting measures. More importantly, Zynga has $1.35 billion in the bank, which will help it find new opportunities for growth, including building out zynga.com, developing new mobile gaming apps and launching a real-money gambling business. These efforts will take time, but they could prove to be lucrative.

And as for the departure of Steve Chiang? It looks bad, but it’s also important that Zynga continue pumping new blood into the organization.

As of right now, Zynga’s shares are absurdly cheap at an enterprise-value-to-revenue ratio of just 0.64. For comparison’s sake, Facebook’s ratio is 12.33.

Tom Taulli runs the InvestorPlace blog IPO Playbook[8], a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook[9]” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders[10].” Follow him on Twitter at @ttaulli[11]. As of this writing, he did not hold a position in any of the aforementioned securities.

Endnotes:
  1. VMW: http://studio-5.financialcontent.com/investplace/quote?Symbol=VMW
  2. weak guidance for earnings;: http://investorplace.com/2013/01/vmware-might-not-bounce-back-this-time/
  3. FIRE: http://studio-5.financialcontent.com/investplace/quote?Symbol=FIRE
  4. STX: http://studio-5.financialcontent.com/investplace/quote?Symbol=STX
  5. disappointing guidance: http://investorplace.com/2013/01/a-selling-wave-washes-over-seagate/
  6. ZNGA: http://studio-5.financialcontent.com/investplace/quote?Symbol=ZNGA
  7. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB
  8. IPO Playbook: http://investorplace.com/ipo-playbook/
  9. How to Create the Next Facebook: http://www.amazon.com/gp/product/1430246472/ref=s9_simh_gw_p14_d0_i1?pf_rd_m=ATVPDKIKX0DER&pf_rd_s=center-3&pf_rd_r=0GRB6ZMCTYDZVNG7Q7NV&pf_rd_t=101&pf_rd_p=470938811&pf_rd_i=507846
  10. High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders: http://goo.gl/pR2F3
  11. @ttaulli: https://twitter.com/ttaulli

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