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

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:

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.