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 (NYSE:TDC) and Skyworks, since I recently outlined Google Inc (NASDAQ:GOOG) as a top pick for March.
|Company||Overall Rank||Investor Score||Customer Score||Employee Score||World Score|
|Teradata Corporation (NYSE:TDC)||2||9.3||6.8||8.9||8|
|Skyworks Solutions Inc (NASDAQ:SWKS)||5||7.1||8.9||8.5||7|
Since it landed Wal-Mart Stores, Inc. (NYSE:WMT) as a client in 1992, Teradata Corporation (NYSE:TDC) 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 International Business Machines Corp. (NYSE: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 Corporation (NYSE:TDC) 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 Corporation (NASDAQ:ORCL), and SAP AG (ADR) (NYSE:SAP).
Teradata, however, has a tough road ahead. Larger rivals like IBM, Oracle, and Microsoft Corporation (NASDAQ:MSFT) 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.