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Spreadsheet
Commodities or technology stocks? That’s the question that investors, particularly Canadian ones, are weighing these days as central banks are poised to raise interest rates. I choose technology stocks. Though tech is more volatile than many sectors, commodity stocks are price-takers—at the mercy of someone else pricing their product. In the case of oil, that’s OPEC+ which historically does whatever it wants.
Looking at technology stocks this week, we’re staying away from the obvious FAANG + Microsoft + Tesla names and considering:
Hewlett Packard Enterprise Co. (HPE-N)
This so-called “old tech” name has gained 52% in the past year. Surprising? Apple has climbed 36%. While FAANG has been stealing the spotlight, HPE has been making money. The company last reported on November 23 (Q3-2021): revenues climbed 9% YOY, adjusted earnings leapt 52% while both numbers beat expectations. Guidance was rosy, forecasting an 8-14% YOY increase in adjusted EPS for fiscal 2022, grounded in solid hardware sales for notebooks and PC’s which amount to 71% of all revenues. A weak spot had to do with anything related to HP’s printing division where revenues faded in Q4, up only 1%, sliding from 24% in Q3 and 28% in Q2. Also, chip shorrtages hitting the entire sector are a headwind.
However, there’s still room to run. HPE trades at only 6.8x earnings. (Name another tech company that low.) Margins are healthy, such as a 12.33% profit. The 2.73% dividend yield is large by tech standards and safe given its 18.24% payout ratio. The company beat its last four quarters comfortably and it could very well extend that streak. Unlike some high-PE cloud or lithium stocks, HPE has real earnings from real products. So, why does the market underestimate these old tech names? The market feels that HPE is fully valued. In fact, in the last six months, Morgan Stanley and JP Morgan have downgraded HPE stock from overweight to neutral or equal-weight. Since the MS call of August 27, HPE has climbed nearly 33%.
I end with a caution, though. HPE stock is trading at all-time highs. Consider this a partial buy, and possibly add more down the road.
Oracle (ORCL-N)
It broke out in 2021, shooting up from $60 to as high as $106. It kept beating its quarters with room to spare. Its most recent EPS was $3.44, an increase of 4.46% over the previous year. Then, right before Christmas, Oracle bought cash-rich e-medical records company, Cerner, for US$28.3 billion. The deal marks Oracle’s entry into online healthcare. If it synergizes well, it will pay off for the company. However, shares slid on rumours of the actual deal and shares have now settled around $88. Some investors are fretting over the deal. Perhaps they fear it will reduce Oracle’s agressive share buyback program of about $100 billion in the last four years.
I see the recent dip as a buying opportunity. Nothing broken here. Oracle stock trades at 25.5x earnings, which lower than Apple’s or Microsoft’s and half of Adobe‘s 52x. True, its ROI of 11.69% lags Adobe’s 24.68% and Intuit‘s 20.62%. However, Oracle is a relatively safe tech stock, because it benefits from recurring revenues and remains profitable. True, they got into the cloud computing game late, but this division is now showing legs. You can buy the technology stock and sleep well. It pays a 1.46% dividend, safe at a 32.78% payout ratio.
Shopify Inc. (SHOP-T)
SHOP stock is the tech elephant in the room. It is, by every measure, a success story and an achievement for Canadian tech. It is also one volatile technology stocks.
In mid-November 19, SHOP stock peaked at $2,139, and now trades below $1,400. That’s a 31% slide. What happened? Omicron hit. Then, the feds announced they would raise interest rates. All tech sold off. To be fair, though, Shopify’s PE was sailing high. Peaking at 651.57x on September 30, 2020, it then plunged to 85.72x six months later, then 50.53x exactly a year later. It now trades at a fairly reasonable 41x. To compare, Apple stands at 30.8x and Amazon 62x. Also, returns are among the highest in the software business with a 24% ROI.
This e-commerce giant will continue to thrive whatever happens with the pandemic or interest rates, but I wouldn’t be surprised if shares slid a little further, like below $1,300 and the PE decline to a more reasonable level. I really don’t know if it will revisit former highs anytime soon. Shopify thrived as a pandemic play, so it’s unknown how the market will take to it when we finally exit Covid.
