Consistent earnings momentum can often lead to upside surprises in the next year. A simple scan of tech companies worth over $2 billion that managed to grow diluted EPS 30% YoY in the last four quarters, reveals just 15 stocks.
Most of these companies were in the semiconductor industry. So, to add some variety, we are listing 5 stocks from different industries within the tech sector.
Advanced Micro Devices (AMD) – Semiconductors
AMD grew its earnings 127% in the last year, with year-on-year growth above 50% in all quarters and above 250% in three quarters. Given that growth rate, the trailing PE of 81 seems justified, and the forward PE of 41 looks downright cheap. AMD is one of the best-placed companies to capitalize on the next round of data centre expansions.
Actually, earnings are expected to fall in the next two quarters, but beyond that they should rebound again. Analysts have missed this stock in the past and may well miss the next rebound in earnings too. This is a stock to add to the watchlist and monitor during the next two earnings cycles.
Harris Corporation (HRS) – Communication Technologies
Harris is largely a play on defence spending, but also sells communication equipment to other government agencies, space programs, and to commercial businesses.
The company has grown earnings by over 40% over the last year, with quarterly YoY growth exceeding 35% every quarter. In addition to strong growth, the company has an ROE of 27%, solid margins, and pays a 1.7% dividend.
The trailing PE is 24 and the forward PE is 18. Several analysts have price targets between $173 and $196, which should be achievable given the strong earnings momentum.
NetApp, Inc (NTAP) – Data Storage Devices
NetApp operates in an interesting niche, selling software, systems, and services to manage on-premise data storage. The company grew its earnings 86% in the last year, with quarterly YoY growth rates of 37% to 154%. In the process, NTAP earned a 60% return on equity, with gross margins of 63%.
The share is trading on a forward PE of 14, after having grown 19% a year over the last 5 years. This would put it on a PEG ratio well below 1.
While earnings growth may well slow, the company’s pricing power should mean downside would be limited. Meanwhile, NTAP is well placed to fill the gap where certain types of data cannot be migrated to the cloud.
Paylocity Holding Corporation (PCTY) – Application Software – SaaS
Paylocity provides cloud-based payroll and HR solutions. In the last year it has gained traction among medium-sized businesses looking to reduce costs. Revenue grew 25%, but the company managed to boost its margins and grow earnings 345% YoY.
PCTY has now reached a size where large investors are beginning to pay attention to it. The PE and forward PE of 90 and 55 respectively are a little high, but if the company can maintain momentum the multiples will unwind quickly.
Fortinet Inc. (FTNT) – Application Software – Cybersecurity
Cybersecurity is a big deal, and Fortinet is a very profitable player in the space. The company has grown earnings 294% in the last year. It also enjoys solid margins and generated a 39% ROE in the last year.
Fortinet has managed to grow its market share in the last few years, while its total addressable market has also expanded. With plenty of cash and high margins, the downside for this stock is relatively limited, while there is lots of potential for upside surprises.
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