First Solar, Inc. (FSLR), Netflix, Inc. (NFLX): What to Focus on As Risk Aversion Rises for Tech Stocks?

First Solar, Inc. (NASDAQ:FSLR)A significantly large gap between consensus analyst targets and the share price of companies is a starting point for investors screening for investing ideas in a down market. After the Dow dropped a net 200 points last week and the Nasdaq dropped 80 points, opportunities will arise for the patient investor.

Since companies in the technology sector tend to act as a leading indicator for markets, they are worth a closer look:

Company % Change in Target # Analysts Current Target price (in $) Last Wk Target $ Gap
Microsoft -1.07 27 32.48 32.83 13%
Applied Materials, Inc. (NASDAQ:AMAT) -1.23 12 14.34 14.52 10%
Xerox 3.23 11 9.14 8.85 2%
First Solar, Inc. (NASDAQ:FSLR) 25.26 18 32.38 25.85 -13%
Netflix, Inc. (NASDAQ:NFLX) 5.64 24 149.03 141.07 -12%

Data Source: www.Bloomberg.com

Investors need to decide what metrics should be used to determine which companies are potential stocks to buy.

P/E ratio



MSFT PE Ratio TTM data by YCharts

The P/E ratio gives little useful information except to illustrate that a company is expensive. Just look at Microsoft Corporation (NASDAQ:MSFT): shares trade a low valuation because growth is expected to remain muted. Relativism matters more than absolute values: Netflix, Inc. (NASDAQ:NFLX) trades at an astonishingly high P/E as does Applied Materials, Inc. (NASDAQ:AMAT).

Analysts think Netflix, Inc. (NASDAQ:NFLX) is trading 12% too high, while Applied Material is 10% below targets. Both companies have different growth characteristics relative to the high P/E. Applied Materials, Inc. (NASDAQ:AMAT) is likely to face greater challenges than Netflix, Inc. (NASDAQ:NFLX), because the chip equipment space is shrinking. Capital expenditure budgets could shrink this quarter. This is being led by news from Intel Corporation (NASDAQ:INTC), which said that capex budget will be lowered by $1 billion. CapEx for Intel will now be $11.5 billion – $12.5 billion.

When CapEx budgets shrink, anticipated growth is not expected to be as high as first thought. Conversely, Netflix, Inc. (NASDAQ:NFLX) found its footing again with customers, after its CEO posted on a social networking site that users spent 4 billion hours in aggregate to view content during the first quarter. If the company reports strong subscriber growth at its earnings call on April 22, then shares will hold their value.

52-week highs

Xerox and First Solar, Inc. (NASDAQ:FSLR) are trading at 52-week highs. Analysts expect little additional upside in Xerox shares, and think that First Solar, Inc. (NASDAQ:FSLR) is trading at a price 13% higher than it should be. Xerox increased its dividend in February by 35%, to $0.0575 per share quarterly. The company hired a new CFO, Kathryn Mikells, who will begin on May 2 2013.

First Solar, Inc. (NASDAQ:FSLR) is up sharply after issuing positive guidance for the next few fiscal years. The company is also making a number of acquisitions. By acquiring TetraSun, the company gained a 60MW solar project in California. First Solar also acquired a 150MW project, also in California. First Solar, Inc. (NASDAQ:FSLR) is valued at a forward P/E of 11.6, compared to 7.43 for Xerox.

Foolish bottom line

Judging the probability for additional gains in a company cannot be done looking at P/E. Even a stock at a 52-week low could move lower, while a company at a new high could keep moving higher. Yet, as market participants reduce their exposure to risks, these quantitative measures do matter more.

Xerox and Applied Materials pay a respectable dividend, while First Solar, Inc. (NASDAQ:FSLR) and Netflix, Inc. (NASDAQ:NFLX) are both moving aggressively to grow revenue. None of the companies mentioned are immune to profit-taking as risk aversion rises, but investors must decide if they are willing to ride past the short-term volatility or to secure the capital gains now.

The article What to Focus on As Risk Aversion Rises for Tech Stocks? originally appeared on Fool.com and is written by Chris Lau.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.