Five under-the-radar U.S. tech giants padding investors’ portfolios
Everyone loves the tech sector. And why not? Most companies within the sector are growing very fast, have high margins, and pristine balance sheets. It’s no wonder that the tech-heavy NASDAQ is leading the North American stock markets in performance this year.
But, as we have outlined before, the TSX Composite Index, in comparison, just doesn’t have a proper allocation of technology names. The exchange seems more interested in adding marijuana companies to its benchmark right now (although, technically, info tech as a sector at 3.9 per cent is still a higher weighting than health care at 1.6 per cent).
With the S&P 500 index at nearly 26 per cent technology, though, there is no way a Canadian investor following the TSX is going to keep up with the S&P 500 if tech stocks continue to do well. So, with that in mind, let’s look at five tech stocks not available for trading on the TSX. Just for fun, even though many readers will not recognize any of these tech names, we have chosen only those companies that are larger than Canada’s largest tech company, CGI Group (GIB.A on TSX). All of the following are larger than its $24 billion (Canadian) market cap.
Atlassian Corp PLC (TEAM on NASDAQ)
Market cap: $21B (US); price/earnings:116 times; no dividend; up 97 per cent this year.
Atlassian is an Australian company that designs and develops enterprise software for project management, collaboration, tracking, integration and so on. It has a net cash position of about $900 million. Earnings have been very strong, and per-share estimates were 7 per cent better than estimates in the second quarter, resulting in even more gains for the stock.
Arista Networks Inc. (ANET on NYSE)
Market cap: US$22.6B; P/E ratio: 41; no dividend; up 28 per cent this year.
Arista provides cloud computing solutions for data centres, offering Ethernet switches, pass-through cards, transceivers and enhanced operating systems. It is a competitor to Cisco. It has $1.8 billion in cash currently. Its stock was lagging a bit until this month, when it was added to the S&P 500 Index, resulting in a 13 per cent gain last week alone.
Square Inc. (SQ on NYSE)
Market cap: US$35.1B; P/E ratio: 189; no dividend; up 147 per cent this year.
Square is a mobile payments solution company, and also has divisions providing services to restaurants (such as delivery). Chairman Jack Dorsey is also the founder of Twitter. Square has lost money since 2012, but it is set to show very rapid earnings growth. Analysts are falling all over themselves raising target prices, and one even called it the ‘next Amazon.’ Certainly, the momentum in its shares is extremely solid, with a new high set nearly every day recently. It has $600 million in cash.
Workday Inc. (WDAY on NASDAQ)
Market cap US$33B; P/E ratio: 123; no dividend; up 51 per cent this year.
Workday provides enterprise-based cloud applications, offering human capital, payroll, spend and financial management solutions. It has $1.8 billion in cash. Per-share earnings are expected to go from a loss of $1.55 in fiscal 2018 to a profit of $1.25 in fiscal 2019. It reports Sept. 4 and analysts expect at least 20 per cent revenue growth in the quarter.
NetApp Inc. (NTAP on NASDAQ)
Market cap US$22.4B; P/E ratio: 19; Div:1.9 per cent; up 56 per cent this year.
By far the cheapest of this bunch on valuation (after a large loss in fiscal 2018), NetApp provides storage and data management solutions. It has paid a dividend since 2013, and in a sign of confidence from management raised its dividend by 100 per cent in April. Its industry is more mature than the other four companies listed here, but per-share earnings are still expected to double from 2014 to next year’s estimates. NTAP recently raised its earnings and margin guidance for 2019, and some see it as a takeover target. It has $3.1 billion in net cash.
When looking at technology companies, investors need to be reminded that most have a very high Beta. That means that sure, they move nicely when the market is strong, but they also fall more than the market when conditions are bad. While we continue to like the prospects for the sector, like anything diversification is key. We are more than happy to go well above the TSX sector allocation, but anything beyond 25 per cent sector exposure amounts to a sector ‘bet,’ and like all bets may work, or may not.
Peter Hodson, CFA, is Founder and Head of Research of 5i Research Inc., an independent research network providing conflict-free advice to individual investors (http://www.5iresearch.ca).