The profit anemia stems from several factors, including:
Extremely low levels of government spending due to the current sequester.
Depressed sales activity in Europe. The tech sector has more exposure to Europe than any other sector.
A lack of any hot new products or trends to trigger interest among buyers.
Yet as we’ve noted many times, several tech firms are sitting on stunning levels of cash. Cisco Systems, Inc. (NASDAQ:CSCO), Microsoft Corporation (Nasdaq:MSFT), Oracle Corporation (NASDAQ:ORCL) and others may have a hard time generating organic growth, but they have a long track record of acquisitions to help get the needle moving.
Though it’s unwise to buy a stock simply because you suspect it is a buyout candidate, you can’t ignore a company’s appeal in a merger and acquisition(M&A) scenario if it has a strong base of technology or an impressive customer list. And you surely need to pay attention if that stock has recently traded sharply lower, creating more compelling valuations for a potential buyer — or simply on a stand-alone basis.
Here are two slumping tech stocks that now hold solid value in light of their considerable growth prospects and market positioning.
Palo Alto Networks
Palo Alto Networks Inc (NYSE:PANW) has arguably the most comprehensive suite of network security system capabilities, helping companies and governments operate their servers without malware, spoofing and other gremlins that can cripple a company’s networks. Palo Alto Networks Inc (NYSE:PANW)’s major clients include Splunk Inc (NASDAQ:SPLK), Citrix Systems, Inc. (NASDAQ:CTXS), Aruba Networks, Inc. (NASDAQ:ARUN) and Ericsson (NASDAQ:ERIC).
Those partnerships have helped fuel triple-digit annual sales growth for five straight years, and sales are on track to rise another 50% this year to around $400 million. Still, the “laws of bigness” are starting to kick in and sales growth could slip below 40%. Slowing growth may explain why this stock has suddenly fallen out of favor.
Another explanation for falling shares: Management has decided to sharply boost headcount (from a recent 950 to roughly 1,400 a year from now) to help keep sales growth above 35% for the foreseeable future. That hiring spree is eating into near-term profits.
Right now, Palo Alto Networks Inc (NYSE:PANW) is the fourth-largest network security firm behind Cisco Systems, Inc. (NASDAQ:CSCO), Juniper Networks, Inc. (NYSE:JNPR) and Check Point Software Technologies Ltd. (NASDAQ:CHKP). However, other companies involved in network management — such as Microsoft Corporation (NASDAQ:MSFT), International Business Machines Corp. (NYSE:IBM) and Hewlett-Packard Company (NYSE:HPQ) — have reportedly been eyeing the security niche in recent years, thanks to its robust growth prospects. Palo Alto Networks Inc (NYSE:PANW) would quickly make them one of the leading security vendors in terms of software functionality.
Analysts at JMP Securities “believe Palo Alto leverages significant technology advantages in the next-generation firewall market,” and they see shares rebounding toward a $60 price target.
