Forget all the talk about the world being in the middle of a tech bubble, this isn’t 1999. Technology plays a more integral part in our lives than ever, and real companies are making real money. The following two tech-based stocks have struggled in recent months, but they could make you rich in the longer run. Recent setbacks could make a handy entry point.
Micro Focus International (LSE: MCRO) has plunged sharply from its 52-week high of 2,675p, and is currently trading at 1,945p. Investors are increasingly anxious over next month’s proposed $9bn purchase of HP Enterprise’s software business,which will lift the company’s debt to a nerve-frazzling 3.3 times EBITDA. Nerves were further frazzled by last month’s news that Micro Focus had presided over a 15% fall in its second half licenses and earnings.
HPE itself then reported poor licence sales, so it began to look like one troubled company trying to purchase another, doubling down on risk. However, I think the worry has been overdone. Playtech’s overall business looks stable, with guidance for the first six months of 2018 expected to be steady. The HPE deal still makes sense, given the lack of product overlap, plus the opportunity for cost savings and higher cash flows. Recent dips in licence sales may prove shortlived, and will also make it easier for management to beat these performance comparatives next year.
Software, hard profits
Micro Focus International, which has a market cap of £5.05bn, trades at a forward valuation of 15.8 times earnings, which is relatively low by its recent standards, and yields 3.3%, covered twice. Operating margins of 31.7% add to the investment case. Forecast earnings per share (EPS) growth of 30% in 2018 also attract.
Management has built a solid business on squeezing efficiencies out of mature software schemes and HPE should continue the trend. Micro Focus is a three-bagger over the past five years, one that I believe retains scope for further strong gains.
Play the game
Online gaming specialist Playtech (LSE: PTEC) has also delivered over the long term, its share price is up 160% over five years, although it has also hit a run of bad form lately. However, the FTSE 250 company’s prospects remain promising, as it gains market share in live casino games and sports-betting, helped by its recent acquisition of BGT. Management also has a strong M&A track record, which should help it create further value.
This £3.11bn company’s prospects look strong, with a forecast 23% growth in EPS in 2017, followed by another 11% in 2018. Revenues are expected to grow sharply while the forecast yield of 3.5% is nicely covered 2.2 times, making this an attractive growth and income play.
Playtech’s lacklustre share performance over the past year could also prove a buying opportunity, with the stock trading at a forward valuation of just 13.3 times earnings. Operating margins and return on capital employed are both just over 41%, which impresses. This company generates plenty of cash and has a strong balance sheet to boot. Long-term wealth investors may want to give it a spin.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Micro Focus. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.