The Good, the Bad and the Ugly: 3 tech stocks in 3 minutes

The second half of 2012 will be very interesting for the technology industry. There are a slew of products coming out, including Windows 8, iPhone 5 , Google's own tablet and more, much more. While some companies are evolving, other companies are restructuring.

So here are three tech stocks with what I have determined are their fundamental values, or what I would pay for them, almost irrespective of what the market would pay for them. 

The Bad
Microsoft: Everyone knows I like Microsoft. I like its economic clout and I like its valuation, it’s also a disliked stock which keeps its valuation down, which is good for any long-term investor. Another reason that I believe the stock is mispriced is because most investors do not understand that Microsoft is mostly an enterprise software company, which means that its earnings are very stable, and most importantly growing. 

 My fundamental value of the company: Around high $30s per share, or a market capitalisation of around $330bn.

Margin of safety: Since the company's earnings are fairly defensive, anything below $30 per share provides a decent margin of safety. The lower the entry price the better, but this applies to any investment.

The Good
Apple: Apple is difficult to value because much of the company’s worth is mostly from its future innovation and customer loyalty. This is definitely not a bad thing, it just means that as a value investor such as myself, I require a much larger margin of safety than for more typical investments. What helps the company but hurts its valuation is the fact that Apple provides no long-term strategy in terms of specific products. This helps the company maintain a technological edge but it also makes the company much more risky to investors.

A smaller company with similar growth might trade in the range of a P/E of around 30-40 if not more, while Apple is trading at around 14, so it is definitely cheap from that historical point of view. But as an investor, you have to understand that you are buying innovation, a strong brand and $120bn in cash when you buy Apple.

My fundamental value of the company: If you believe that Apple will keep evolving and remain innovative, than this stock is probably worth around $800 a share if not more.

Margin of safety: Because the company is very driven by innovation, a large margin of safety is required, I would say that  I would find $400 bn of market capitalisation more reasonable. This might appear extremely low, given that the stock is currently priced at $530 bn at a low valuation, but it is simply because as a conservative value investor I have to remain very sceptical about the the innovation aspect of the company, of any company really.

The Ugly
Nokia and RIM: Both companies are in trouble, but I believe Nokia is in much bigger trouble. Nokia is more bloated and simply bigger than Research in Motion which I believe is much more scary for any potential acquirer. Although RIM's niche is deteriorating quickly, its corporate business still has some value and additionally RIM's balance sheet is also much cleaner and leaner.

My fundamental value of RIM:  Conservatively estimated at around $9.50 (currently trading at around $9). This is basically a pure balance sheet liquidation value, where I 'consider' the value of the actual business to be zero.

Margin of safety: This isn't a growth stock, this is a liquidation or takeover play.  Deep value, in my opinion, would be at around $7 per share, because any stock can be a good investment at a low enough price.

I believe that Nokia is a completely different story but it is a liquidation play though not as cheaply valued as RIM, and it includes an ugly balance sheet. But the company is burning through cash, while some note that Nokia has €7 billion in cash, it also has €5 in debt, while RIM has no debt.

 So whatever happens during the reat of 2012 will surely be interesting because no other industry compares to technology's dynamics and innovation. 

For additional details on these stocks, take a look at Saxo Bank’s Equity Research offering here.

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