A CES attendee touches an interactive wall display inside the Microsoft booth during the 2010 International Consumer Electronics Show at the Las Vegas Hilton.Justin Sullivan/Getty Images
Tech stocks have been getting plenty of attention lately - and for good reason. Technology firms have been among the biggest gainers in the last few months, outpacing the ascent of the overall market by a decent margin. As the S&P fights to gain higher ground, investors will continue to turn to tech firms for outsized gain potential.
Some tech stocks, though, are looking more attractive than others in this market. With the run-up that this sector has made lately, some investors are starting to get squeamish over concerns that their stocks may be overbought. But not all tech plays have seen their share prices rally in step with their fundamental performance.
Here's a look at five tech stocks that could fare especially well in this market.
It's hard to even talk about tech stocks without bringing up Apple Inc. . This Cupertino, Calif.-based tech giant has come a long way since teetering at the edge of bankruptcy in the 1990s. Today, this stock has become a darling of Wall Street, rallying nearly 50 per cent year-to-date and more than 460 per cent in the last five years. With such a sizable upward gallop, has this stock's gain potential run its course?
Unlikely. While Apple's climb has been swift, it's been warranted. In this week's earnings call, the company reported revenue of more than $20-billion (U.S.) - nearly as much as the company saw for the entire year back in 2007. With a major foothold on the lucrative portable device market and the No. 1 music retailer in the iTunes Music Store, Apple's growth prospects continue to evolve in 2010.
Let's not forget about the company's computer business, which was the focus of Apple's media event yesterday. Counting sales of the iPad, Apple took home the title of the world's largest computer manufacturer in the latest quarter, ousting Hewlett Packard Co. and Dell Inc.'s dominance in the industry. (Without iPad sales, Apple still ranks third with nearly 10 per cent of this fragmented market.)
Because the pace of Apple's growth is unlikely to slow in the near-term, shareholders should continue to see upside in the company's shares.
Cisco Inc. made news last month when CEO John Chambers announced that the network hardware firm would start paying a dividend in fiscal year 2011, a departure from his previous decision to wait several years before paying out a chunk of Cisco's earnings to shareholders. That makes Cisco the latest in a string of tech stocks to announce a dividend initiation or increase in payouts, a move that's suggestive of the kinds of investors these firms are trying to attract.
Where tech stocks like Cisco were treated like speculative small-caps in the late 1990s, they've emerged a decade later as blue-chips with serious business models and mature balance sheets. Cisco's position is especially enviable right now. With the leading position in enterprise networking hardware, Cisco has built itself a deep economic moat with substantial growth opportunities.
The aging hardware infrastructure being used by many datacenters is in need of replacement in the next few years - upgrades that Cisco will be a major beneficiary of. Shares of Cisco have languished for most of 2010. As IT spending ticks up in the coming quarters, investors should be able to make up for lost time.
Adobe Systems Inc. may be best-known among consumers as the company behind ubiquitous technologies such as Acrobat and Flash, but to investors, the company is the undisputed king of software for creative professionals. From Photoshop to InDesign, Adobe's big-ticket software can be found in nearly every design firm, print shop and video production facility in the world.
That market position has hiked up the costs of switching from Adobe's training-intensive products, and ensured high levels of sales for successive software releases. That said, investors will need to watch for weakness in Adobe's efforts to woo retail consumers. Adobe primarily markets its document standards (like PDF and Flash) to consumers - applications that lack the switching costs or user satisfaction of the company's pro products. Likewise, with software packages that cost more than most computers, piracy remains a major hurdle for Adobe to overcome.
Still, shares of Adobe have gotten shellacked this year. The company's stock is currently trading for nearly 25 per cent less than its early January prices. With deep margins and a reliable customer base, it's unlikely shares will stay prices so low for long.
Piracy and satisfaction among retail customers are also challenges being faced by Activision Blizzard Inc. right now. The $1.2-billion game developer is the name behind some of the most lucrative multiplayer game franchises in the industry, titles that create massive revenue opportunities for ATVI's owners.
ATVI benefits from a large base of intellectual property - an especially important resource for a software company, one that doesn't always show up on the balance sheet. The feather in the company's cap is the World of Warcraft franchise, a title whose nearly 12-million online subscribers provide substantial recurring revenues. Nearly half of those sales come from Asia, a high-growth demographic that ATVI has been good at targeting with new game releases.
Recent years' pullback in discretionary spending has scared some investors away from entertainment companies such as Activision Blizzard, a trend that this company will only be able to buck by showing fundamental growth. The company will get its next chance to show off its numbers during its third-quarter earnings call on Nov. 4.
Finally, there's Applied Materials , a $16-billion semiconductor stock that caps off our list of technology stocks. Few industries in the tech sector have seen as much of a pullback as semiconductors - after all, chip sales are highly susceptible to changes in consumer spending, which fell off a cliff in 2008. Now, with chip inventories reaching lows, we could see a boost in sales for firms like Applied.
To be fair, calling Applied Materials purely a semiconductor play isn't really the whole story. In reality, the company is a leader in the nanomanufacturing market - a fancy word for the business of building small. Besides chip fabrication tools, the company's products include flat screen monitor components and solar panels.
Investors should be able to catch a glimpse of Applied's growth potential for the coming quarters when the company delivers earnings on Nov. 17.
This article has been republished from Stockpickr