Most investors are aware of the fact that the stock market can be a cruel and fickle mistress. What is big and cutting edge one day, especially in the technology world, can easily become yesterday’s news. The tech graveyard is littered with single-digit share priced dogs like Nokia Corp. (NYSE: NOK), Advanced Micro Devices Inc. (NYSE: AMD) and others that will most likely never return to past glory. UBS A.G. (NYSE: UBS) is very positive on two former high flyers that they see returning to prominence sooner rather than later.
Cloud infrastructure product and technology leader VMware Inc. (NYSE: VMW) is the first fallen angel. In a report released today, the team at UBS points out that the history of software investing is filled with examples when it was profitable to “buy the dip” on misses from high-quality software companies. They cite the recent VMware sell-off as very similar to Salesforce.com Inc. (NYSE: CRM) in late 2011 when their third quarter fiscal 2012 earnings report missed and the stock plunged under $100 on a ‘high multiple stock/growth deceleration’ combo scare. Steady positive estimate revisions have continued since and the stock has nearly doubled.
After a $25 pullback from its highs, VMware could be poised for a similar upward price move. UBS analyzed fiscal year 2013 guidance and argues that it looks too low based on 2013 catalysts and possible strong second half of the year tailwinds. They point out that buying high-quality software stocks after weak earnings/guidance events can produce big gains for investors. The $115 price target would represent a 55% move from Friday’s $73.88 close. The Wall St. consensus estimate is $100.
The other fallen angel is voice recognition software company Nuance Communications Inc. (NASDAQ: NUAN). Its products are used in Apple Inc. (NASDAQ: AAPL) iPhones and in the health care market, and Nuance also is down almost 30% and trading near a 52-week low. The UBS analysts believe there is more value in Nuance’s leadership position in health care and mobile than is reflected in its 10X price to earnings. However, to regain investor confidence, the company needs to be more reliable in its messaging and execution.
With voice recognition becoming a new standard in the hugely profitable smartphone and tablet world, Nuance is poised to do $1 billion in revenues in 2013. UBS also thinks that voice recognition becomes standard for use in TVs, cameras and other appliances. The analysts argue that the next version of Siri in the iPhone should have much more advanced functionality. The UBS price target is $28, while the Thomson/First Call estimate is right in line at $28.
Chasing stocks that have been badly damaged can be very dangerous for investors. But if a company has a solid product line and a good future, buying when sentiment is as low as the stock price can be very rewarding. Remember the Netflix Inc. (NASDAQ: NFLX) debacle. Much of that was attributed to a horrible public relations miscalculation by CEO and founder Reed Hastings. The stock went from almost $300 to the mid $50s. Savvy investors who bought there tripled their money as Netflix closed Friday at $184.70.