Although plenty of Tech companies offer great growth prospects and market out-performance, the last ten years have taught me to invest more wisely. Instead of looking for humongous growth, I search for companies that offer sustainable -and attainable- expected growth rates, plenty of cash to back its development and an economic “moat” to keep competitors at bay. EMC Corporation (NYSE:EMC), Check Point Software Technologies Ltd. (NASDAQ:CHKP) and salesforce.com, inc. (NYSE:CRM) are three companies that satisfy these criteria; so, let’s try and elucidate which ones are good investment opportunities at their current valuations.
EMC Corporation (NYSE:EMC)‘s storage and security solutions and services fit at every level of a company’s IT infrastructure. Mainly focused on providing infrastructure and security for Cloud Computing and Big Data, this industry leader holds about 30% of the market share. EMC Corporation (NYSE:EMC) seems especially positioned to benefit from the expanding demand for Cloud Storage and Big Data Solutions, which are expected to drive growth in upcoming years. This trend should be boosted by the increasing use of smartphones and tablets, whose limited processing capability and storage space should continue to create the need for cloud storage solutions. As a result, analysts expect an annual growth rate around 13% over the next five years, a figure that, although under the industry average, looks pretty good (and attainable).
As stated above, EMC Corporation (NYSE:EMC) counts with two particular advantages over most of its peers: a considerable moat –mainly in account of high switching costs for its clients and a scale that is not easy to match- that helps keep competitors lagged and its massive cash flows and war chest: over $5 billion in free cash flow and around $11 billion in cash and equivalents. This has and will continue to allow the company not only to invest in new products and strategic acquisitions, but also to return value to shareholders through stock repurchases and dividends.
Going forward, acquisitions and alliances will also play an important role for EMC Corporation (NYSE:EMC)’s development. In the last few years, the VMware purchase in 2004 and alliances with Lenovo, Cisco, Intel, Microsoft and Oracle, amongst many others, have proven very profitable for the firm and should continue to do so.
Although it trades above the industry average, I believe that EMC Corporation (NYSE:EMC) is still undervalued and constitutes a profitable long-term investment. I’d say, buy; with a strong cash position, plenty of growth prospects and a fair moating, this company looks safe enough to put our money down.
Check Point Software Technologies: Computer servicing & manteinance
Check Point Software Technologies Ltd. (NASDAQ:CHKP) provides companies with innovative software to protect their computers and enhance their performance. It offers a range of products that comprises firewalls, endpoint and data protection, amongst others. The firm charges an annual fee to keep its clients’ software updated and functional. This service has not only differentiated the company from many of its peers, but has also provided a steady source of revenue. These two elements have kept the company moated and profitable, and will most likely continue to do so in the years to come.
In addition, several elements could drive growth in the long-term. For starters, cyber-security is becoming more and more relevanct for companies, providing strong tailwinds for Check Point Software Technologies Ltd. (NASDAQ:CHKP). Moreover, its software appliances centralize all of the security functions in one console; this makes them user-friendly and generates considerably client stickiness.
The company is expected to deliver an average annual EPS growth rate of around 11%, a target that seems easily reachable, since the company holds not only a strong brand name, but also plenty of cash to support its expansion plans. With almost $900 million in free cash flow and zero long-term debt, its balance sheet looks quite strong. Consequently, acquisitions will play an important role in the years to come, as evidenced by the the purchases of Protect and Nokia´s security appliance business.