It seems as though, more than any other sector, technology stocks divide opinion among investors. For some, they are hugely appealing and offer the chance to enjoy superb growth rates through the provision of exciting and innovative products. For others, however, they are hugely unpredictable, volatile and, in the long run, are superseded by new and improved products and business models.
Track Record
However, not all technology companies are particularly volatile. For example, the UK’s most prominent tech company, ARM (LSE: ARM) (NASDAQ: ARMH.US), has been profitable in all of the previous five years, with its bottom line growing in four of those five years. That’s a better track record than most of its FTSE 100 peers – many of whom are businesses that are viewed as relatively defensive and much more consistent than tech stocks such as ARM.
As such, ARM could be viewed as a tech stock for everyday investors, with its nimble, idea-focused business model requiring only relatively small amounts of capital and reinvestment. And, looking ahead, ARM is expected to grow its bottom line by 74% this year and by a further 20% next year, which could bolster investor sentiment in the company and push its share price to higher highs – even though it is up 17% already this year.
Valuations
Similarly, many investors are put off tech stocks due to their sky-high valuations. While this can be true in many cases, there are also some great value stocks on offer in the tech sector. For example, set-top box manufacturer, Pace (LSE: PIC), currently trades on a huge discount to the wider index, with it having a price to earnings (P/E) ratio of only 10.3, versus 16 for the FTSE 100.
Certainly, there are considerable changes set to take place at Pace, with its £1.4bn merger with Arris Group due to take time to implement and for the planned synergies to come to fruition. And, while Pace is a tech stock, its bottom line is due to grow by just 5% next year, although its longer term growth rate remains very bright and, as such, its shares could be the subject of an upward rerating in the medium to long run.
Risk/Reward
Of course, there are some tech stocks that come with a higher valuation than Pace and lower forecast growth rate than ARM. One such company is Imagination Tech (LSE: IMG), which is set to increase its earnings by 34% this year and 20% next year, and which trades on a P/E ratio of 29.5.
However, that’s not to say that it lacks appeal at the present time, since Imagination Tech trades on a very lucrative price to earnings growth (PEG) ratio of 0.8, which indicates that there is considerable upside potential. In fact, it could be argued that Imagination Tech offers the best of both and, as a result, appears to be worth buying alongside ARM and Pace right now.