One Good Tech Stock That's Been Clipped

08/02/2012 9:00 am EST

Focus: STOCKS

Rob DeFrancesco

Founder, Tech-Stock Prospector

A slow economy means few people are spending or hiring, and that means tech companies are finding the competition tougher for new business, as well as more tire kickers than before, writes Rob DeFrancesco of Tech Stock Prospector.

A wave of cautiousness is sweeping through the tech sector, caused by a demand slowdown in Europe and a downshift in the US economy. Each day brings a new set of downgrades and price-target reductions from Wall Street analysts.

If the economy is headed into another pullback, glory will go to those who got out ahead of the curve. But we could simply be witnessing a different stage of what we’ve been going through over the past couple of quarters—just muddling along.

We will know more after the second-quarter earnings season. I suspect a bunch of companies will offer tepid Q3 guidance, which could set the stage for a rally later in the year if things turn out better than expected.

Another twist is that some companies will use the current economic malaise to try to temporarily mask internal problems. After all, it’s a lot easier to blame the economy than to own up to poor execution.

We saw a bit of this during the first week of July, when Informatica (INFA), a provider of data integration software, warned that Q2 revenue would come in as much as 13% below the consensus estimate and EPS would fall ten cents short of the consensus of 37 cents because of problems closing deals in Europe.

On the news, the stock plunged nearly 28% in one session, shearing off roughly $1.3 billion in market cap, and hit a new 52-week low at $28.12. With the company considered a Big Data play, Informatica shares traded above $54 (up from $36.93 at the end of last year) as recently as early April.

According to CEO Sohaib Abbasi, the deals were simply pushed, not cancelled, as customers took longer to evaluate contracts. This argument is always trotted out because no CEO is going to say that business is being lost to the competition.

While it’s difficult to quantify, I estimate that at least half of this Informatica miss can be blamed on company-specific execution issues.

While Informatica’s valuation has come in quite a bit (the market cap of $3.4 billion is 3.6x the 2013 consensus revenue estimate of $944 million), the stock will most likely be dead money for a while as the company gets its house in order, particularly on the sales leadership front.

Given the elevated risk following this big miss (the old cockroach theory), Informatica shares would be most attractive on a pullback to the mid-$20s.

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