Why You Should Buy These 2 Tech Titans Today
It's earnings season again, and the stock market's giving the tech sector the ride of its life. Stocks that came in ahead of analyst expectations are enjoying double-digit rallies, while other tech favorites, including Apple (NAS: AAPL) and IBM (NYS: IBM) , were crushed for missing earnings. Let's look at what this means for the two tech titans.
Straight talk about Apple's Q4 fail
By now you're aware that Apple missed estimates for the first time since 2002. What didn't make headlines is that the company's profits spiked more than 50% -- and gross margin was 40.3% compared with 36.9% for the same quarter a year prior.
An even closer look shows us it was Apple's second-best quarter ever. But because it didn't continue the momentum forward from Apple's amazing springtime sales, it was deemed a failure.
The quarter marked the end of Apple's fiscal 2011, with the company boosting annual revenue growth to $108 billion. It was also a record September for the company, which reported cash generation of $5.4 billion during the quarter.
More than anything else, this outcome emphasizes Wall Street's poor judgment call in assessing consumers' decisions to delay iPhone purchases until the 4S release. Apple's stock slid 5.6% as a result of not meeting analyst expectations -- creating a crucial buying opportunity for investors reading between the lines.
By comparison, Google's (NAS: GOOG) stock jumped on higher-than-expected earnings for its third quarter. The search giant reported $9.2 billion in revenue for the quarter, up 33% from the same quarter a year ago.
Unlike the selloff following Apple's earnings, investors responded by boosting Google's stock price 6% to $592.36 a share in extended trading following the company's earnings announcement.
IBM's on its way up
Another stock to consider buying on disappointing earnings is information-technology company IBM. The company's sales increased 8% to $26.2 billion year over year, but analyst predictions were pegged at $26.3 billion for the quarter.
Not surprisingly, shares fell after revenue came in below analyst estimates -- dropping 4.1% to $178.90 at the close on the New York Stock Exchange.
Analysts continue to underestimate IBM's growth potential, but investors shouldn't make the same mistake. In addition to the company's successful innovation-based strategies, IBM continues to invest in growth initiatives like cloud computing.
For the year, IBM's stock has outperformed the S&P 500, up 28% versus a 4% dip in the index. Business analytics and cloud computing are driving its success. The company's cloud revenue has already doubled that of last year's, and revenue from analytics is up 19% year to date. IBM has plenty of competition in the cloud from the likes of Microsoft (NAS: MSFT) , which saw its cloud-heavy server and tools business rise only 10% over last year, but IBM has enough of a head start over its competitors that it should continue to grab market share as cloud computing becomes more prevalent.
Cloud computing is indeed changing the way businesses process and share data. IBM's promising growth initiatives, including its early move in cloud computing, should positively affect the company's services and software. Further expansion into data analytics down the road will also boost profits.
Making room for the titans
It might seem silly to call a 5% dip in the world's most valuable publicly traded company a "buying opportunity." However, at $405.61, Apple's share price hardly reflects the value of its growth prospects and current earnings power. Consider that Apple's cash and equivalents were as high as $81.57 billion at the end of its last quarter -- the highest net cash of any publicly owned company by a long shot.
So what's holding shares back? My Foolish colleague Morgan Housel tackles this subject and introduces four cheap tech stocks as he explains that the lack of dividends from some of these tech giants could be at fault.
IBM, which does pay a dividend, boasts annual revenues of $100 billion and is currently battling Microsoft to claim the title of second-largest company in the tech world. However, investors who are bidding down the company's shares seem to be ignoring the continuing strength of IBM's position moving forward. Another indicator of future growth is that IBM managed to increase its total services signings to $12.3 billion in the last quarter.
We've seen strong performances from both IBM and Apple over the years, and despite recent earnings misses, these companies have a lot of growth ahead of them. Investors would be wise to buy and hold shares, but if you're interested in more tech ideas, I invite you read The Motley Fool's free report: "The Only Stock You Need to Profit from the New Technology Revolution." The report exposes a tech company that is at the forefront of an explosive growth field in technology. Access the report today -- for free!
At the time this article was published Fool contributor Tamara Rutter owns shares of Apple. Follow her on Twitter, where she goes by@TamaraRutter. The Motley Fool owns shares of Microsoft, Apple, IBM, and Google.Motley Fool newsletter services have recommended buying shares of Google, Apple, and Microsoft, as well as creating bull call spread positions in Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.