To everything, there is a season. Markets ebb and flow, and so do the fortunes of individual companies and their stocks. So where should a tech investor turn for a great buy-in window right this minute?
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That's what we asked a few of your fellow investors here at The Motley Fool, and they were quick to come back with some fantastic and timely tech tickers. Read on to see why they selected PayPal (NASDAQ: PYPL), Microsoft (NASDAQ: MSFT), and Ultra Clean Holdings (NASDAQ: UCTT) for your consideration.
A growth story in the cloud
Tim Green (Microsoft): The tech-heavy Nasdaq index is up nearly 30% year to date. With new highs being reached seemingly every day, there isn't too much value to be found among tech stocks. One option, though, is Microsoft. The stock is far from cheap, but it's a relative bargain compared to some of its big-tech peers (I'm looking at you, Amazon). And with the cloud business growing fast, November looks like a good time to consider buying the stock.
First, the valuation. Microsoft has generated about $32 billion of free cash flow over the past 12 months, putting its market capitalization at around 20 times this number. That doesn't sound too expensive, especially considering the $53 billion in net cash sitting on Microsoft's balance sheet. Microsoft is clearly a cash flow machine, and it looks like the market is giving it the right amount of credit.
One thing driving Microsoft's cash flow is its cloud business. The company exceeded $20 billion in commercial cloud annualized recurring revenue during its latest quarter, a category that includes the subscription versions of software like Office, as well as the Azure cloud platform. Azure is still nearly doubling revenue year over year, putting Microsoft in a strong No. 2 position behind market leader Amazon Web Services.
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A reasonable valuation coupled with a cloud computing growth engine firing on all cylinders makes Microsoft a top tech stock to buy this month.
These bargain prices won't last long
Anders Bylund (Ultra Clean Holdings): Coming into last week's third-quarter earnings report, shares of Ultra Clean Holdings had more than quadrupled in 52 weeks. After that report, the stock is trading at a 25% discount -- and there's nothing wrong with Ultra Clean's long-term prospects.
The maker of tools used by semiconductor manufacturers has been on a roll in recent quarters, and the third-quarter update was no exception. Sales and EBITDA earnings are on the rise, and quickly:
It's true that share prices have followed suit, broadly speaking. You could argue that Ultra Clean shares were overdue for a correction in October, but that's actually a difficult position to defend. The stock was trading at just 17.5 times trailing earnings before the recent crash, and now you can pick up shares at the bargain-bin price of 13.3 times trailing earnings.
And here's what Ultra Clean's CEO, Jim Scholhamer, thinks about his company's current prospects:"These are exciting times in the semiconductor capital equipment industry and early forecast[s] indicate a very strong start to 2018. We plan to capitalize on strategic growth opportunities, both organic and inorganic that we believe will take UCT to the next level."
Looks like the good times should keep rolling, and I'm sorely tempted to take advantage of this buy-in window myself.
Not your grandfather's PayPal
Danny Vena (PayPal): PayPal may have started as merely a payment option on websites, but it has grown into a full-service digital payment platform.
PayPal embarked on a campaign of partnerships that includes most credit card companies and many big banks. This allows PayPal customers to use their digital wallet and choose any funding source whether online, in-app, or in store, without ever revealing their credit card number.
Peer-to-peer payment system Venmo has been a hit, raking up $30 billion in total payment volume in the last 12 months, up 106% year over year. In the third quarter, Venmo payments of $9 billion increased 93% over the prior-year quarter. Until recently, this service hadn't generated any revenue for PayPal, but that just changed.
In October, the company launched its Pay with Venmo service, which is currently accepted at more than 2 million merchants but will eventually allow users to pay with Venmo everywhere PayPal is accepted. Venmo will still be free to consumers, but PayPal will charge merchants to process the payments.
These moves have resulted in a quickly escalating customer base. In the third quarter, PayPal added a record 8.2 million active customer accounts, up 88% over the prior-year quarter, and growing to 218 million.
More customers equates to more profits. In the third quarter, PayPal produced revenue of $3.24 billion, up 21% over the prior-year quarter, and net income of $380 million, up 18% year over year.
Venmo will likely be a huge growth driver for PayPal and its shareholders.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Anders Bylund owns shares of Amazon. Danny Vena owns shares of Amazon and PayPal Holdings. Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and PayPal Holdings. The Motley Fool has a disclosure policy.