The Motley Fool recently sifted through thousands of publicly traded companies to identify the 25 Best Stocks in America. For investors out there eyeing the technology sector, I'll analyze the top tech picks on the list. Spoiler alert: Don't go all in just yet.
The Motley Fool's extensive study scored companies "by their success in serving investors, customers, employees, and the world at large." In the table below, I've included the top three technology companies' respective scores and overall ranks in the list. In this article, we'll focus on Teradata and Skyworks, since I recently outlined Google as a top pick for March.
Since it landed Wal-Mart as a client in 1992, Teradata has set the industry standard for high-end data warehousing. Teradata helps large businesses make sense of overwhelming amounts of data, so that managers can make better decisions. As evidence of its pricing power and market leadership, the company's gross margin has held steady at about 56% for the last three years. Competitor and tech behemoth IBM comes in as a distant second, with trailing-12-month profit margins of 48%.
The business of high-end data warehousing is extremely sticky. Current clients are unlikely to switch to another data warehouse provider due to the complexity, deep integration, and seven-figure costs. Furthermore, Teradata typically keeps its clients close and develops ongoing relationships with them. When we break down Teradata's 2012 revenue, 51% comes from either consulting or maintenance services.
Furthermore, Teradata has been able to reward investors with 9% annualized revenue growth and 17% annualized EPS growth for five years straight. In fact, Teradata's EPS growth has actually accelerated during the last five years, thanks mostly to Teradata's push into data analysis tools, which has opened the door to new opportunities for expansion. The result? Teradata's stock has handily outperformed both the S&P 500 and close rivals IBM, Oracle, and SAP.
Teradata, however, has a tough road ahead. Larger rivals like IBM, Oracle, and Microsoft are expanding into Teradata's turf with competing offerings, and potentially challenging its leadership in the industry with their outsized financial power. Though Teradata may be a leader in high-end data warehousing, Oracle, IBM, and Microsoft make up 80% of the database market. Both their large financial resources and their software prowess position them to compete aggressively when it comes to business analytics solutions. IBM's acquisitions of Cognos, SPSS, Initiate Systems, and Netezza -- all business intelligence solutions -- during the last few years are clear evidence of its determination to compete in Teradata's space.
With competition increasing, Teradata's future is uncertain. The company will undoubtedly continue to rank as a significant player for years to come, but it could lose its position as a leader. At about 24 times earnings, Teradata could have trouble meeting market expectations. Current shareholders definitely shouldn't sell this great American company, but interested investors should wait for a significant dip before they consider buying.
Skyworks is a semiconductor company that manufactures chips to refine and process analog signals. In a sense, these chips take weak signals and refine them, passing along a stronger signal.
Though Skyworks boasts an impressive client list -- Apple, Samsung, Cisco Systems, and General Electric, to name a few -- this doesn't make up for the risks of being involved with an overcrowded market. Skyworks' chip in the iPhone 5, for instance, competes with chips from TriQuint Semiconductor and Avago. As fellow Fool Anders Bylund noted, "This company simply cannot afford to rest on its voluminous laurels, or its largest customers would easily be able to source their radio chips from other designers."
On Feb. 22, Qualcomm unveiled plans for its own radio frequency chip, adding to the already challenging market. This certainly isn't good news for Skyworks. Analysts at Raymond James responded immediately with a downgrade on Skyworks' stock.
At almost 19 times earnings, Skyworks is just too expensive. The uncertainty involved does not support such a premium.
Even America's best companies are not always great investments. Although exemplary interactions with customers, employees, investors, and the world are factors that definitely play a role in valuation, they are no substitute for the basics. There are two major missing components here for a complete valuation: evidence of a company's competitive advantage, and a justifiable price. Both Teradata and Skyworks fail these tests.
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The article Are America's Best Tech Companies Actually Good Investments? originally appeared on Fool.com.
Fool contributor Daniel Sparks has no position in any stocks mentioned. The Motley Fool recommends Apple, Cisco Systems, Google, and Teradata. The Motley Fool owns shares of Apple, General Electric Company, Google, International Business Machines, Microsoft, Oracle, Qualcomm, and TriQuint Semiconductor. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.
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