Tech stocks continue to make headlines. Often, this is due to the competitive race to get new products on the market. Sometimes, it is due to the spectacular rise—or spectacular fall—of a tech stock’s share price. But successful investors look beyond the headlines, to a company’s measurable strengths and weaknesses, to judge its long-term prospects, as we do today with one of the best-known names in the industry.

GOOGLE INC. (Nasdaq symbol GOOG; investor.google.com) is the world’s leading Internet search engine. The search service is free, but it provides a platform for Google to sell ads on its websites. Ads account for 96% of its total revenue.

Google continues to hire new employees as it builds up its non-search operations, including its Google+ social-networking site. Google+ now has 90 million users, up from 40 million in October 2011.

Even with these extra expenses, Google’s earnings in the three months ended December 31, 2011 rose 9.7%, to $3.1 billion from $2.85 billion a year earlier. Earnings per share rose 8.6%, to $9.50 from $8.75, on more shares outstanding. These figures exclude unusual items, mainly stock options paid to employees.

Tech stocks: Advertisers get more clicks on Google ads, but pay less

Revenue in the quarter rose 25.4%, to $10.6 billion from $8.4 billion. Google charges advertisers every time a user clicks on one of their ads. In the latest quarter, paid clicks rose 34%. However, the average cost advertisers pay per click fell 8%.

The company spends 13% of its revenue on research, so it’s more profitable than it seems. Moreover, Google holds cash and investments of $44.6 billion, or $137.78 a share.

In the latest edition of Wall Street Stock Forecaster, we examine Google’s ability to sustain its leading position in the ever-changing Internet search engine industry. We also look at the recent surge from Apple (symbol AAPL on New York), another stock we cover in Wall Street Stock Forecaster. We conclude with our clear buy-hold-sell advice on both stocks.

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Pat McKeough responds to many personal questions on specific stocks and other investing topics from the members of his Inner Circle. Every week, his comments and recommendations on a selection of the most intriguing questions of the past week go out to all Inner Circle members. And every Friday, we offer you one of the highlights from these Q&A sessions.

This week, the subject of tech stocks came up as one Inner Circle member asked about a company that makes software that is vitally important for computers and mobile devices, but also faces a highly competitive market.

Q: Hi Pat: Pat: What do you think of tech stock CounterPath Corp. Thanks.

A: CounterPath Corp., (symbol CCV on Toronto; www.counterpath.com), makes voice-over-internet-protocol (VoIP) software for computers and mobile devices.

VoIP technology converts analog signals, mainly voices, to a digital format. This makes it possible for users to make low-cost phone calls over the Internet, as well as share video and instant messaging at the same time.

CounterPath has over 250 customers in more than 50 countries. The company’s clients include major telecommunications companies, such as AT&T, Verizon, BT (British Telecommunications plc) and Mobilkom Austria.

CounterPath also sells its technology to network equipment makers, such as Avaya, BroadSoft, Cisco Systems, GENBAND, Metaswitch Networks and Mitel.

Tech stocks: Chairman’s history of success gives CounterPath sound pedigree

In the three months ended October 31, 2011. CounterPath’s revenue rose 35.3%, to a record $3.5 million from $2.6 million a year earlier (all figures expect share price and market cap in U.S. dollars). Revenue from software sales (61% of total revenue) rose 21.5%, to $2.1 million from $1.8 million. Service revenue (39% of total revenue) rose 64.9%, to $1.3 million from $816,346.

The company earned $112,049, or nil per share, in the latest quarter. A year earlier, it lost $845,999, or $0.03 a share. CounterPath holds cash of $7.2 million, or $0.18 a share, and has no debt.

The shares come with something of a pedigree, because of the involvement of Terrence Matthews as chairman and director. Matthews has founded or funded over 80 companies in the high tech communications field. Several, including Mitel and Newbridge Networks, have gone on to great success. Of course, many companies that Matthews launched failed to thrive, as you’d expect.

In the Inner Circle Q&A, Pat looks at whether the company can continue to benefit from accelerating trends that are making VoIP technology more accessible to everyday users of smartphones, tablet computers and other mobile devices. He also analyzes whether its research spending is enough to keep pace with competitors. He sums up with his clear buy-hold-sell advice.

Inner Circle members see Pat’s analysis and recommendations on the stocks that other members have asked about in each week’s Inner Circle Q&A. You can view it immediately when you become a member of this special investment group. You will get Pat McKeough’s answers to your personal investment questions, full access to our members-only Inner Circle website, and many other membership privileges. Click here to get started right away.

(Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.)

On Friday, in response to a question from a member of my Inner Circle, I talked about Cisco Systems and the challenges technology stocks face in a highly competitive industry. (View the article: Technology stocks: Cisco Systems strives to maintain its leadership in cutting-edge technology.)

Today I’d like to follow up by discussing the risks and rewards investors can expect with tech stocks in general. Fast-changing technology offers huge opportunities in these stocks. However, fast change can also bring danger.

Below you will see 4 risk factors you face when investing in tech stocks. Further on, we look at 4 ways you can minimize these risks—and increase your profits.

1. Marketing is as hard as inventing: Even a great new product or computer program may fail to overcome the scepticism of retailers and consumers.
2. A tech stock’s acquisitions can bring “time-bomb” risk: Companies sometimes grow quickly by buying other companies. But those selling the companies may simply want to bail out of a losing situation.
3. Major tech stocks also make mistakes: Junior technology stocks often trumpet their deals with major firms, such as Apple or IBM. And it’s true that Apple and IBM have vastly more knowledge and bargaining clout than any individual investor. But they still invest in products that fail.
4. High-tech shams are common: It’s easier to set up a company and sell stock to investors than to perfect a technological breakthrough. Be especially wary when junior technology stocks splurge on elaborate web sites and glossy investor brochures.

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4 ways to reduce risk and increase rewards with tech stocks

1. Diversify: The high-tech sector has more than its share of winners and duds. So invest carefully and buy 5 to 10 technology stocks instead of just one. Gains on your winners should overwhelm any losses you have.
2. Focus on up-and-coming technologies: For this, you need to know how technology is changing. For instance, the immense popularity of wireless devices, like the iPhone and iPad tablet computer, is increasing demand for faster, more reliable wireless networks.
3. Buy multi-product companies: Technological advances come in spurts, and leapfrog each other. Focus on technology stocks that have a number of existing or soon-to-be-released products, and avoid one-hit wonders.
4. Look for earnings: A perpetual money loser will eventually go broke, no matter how impressive its technology. But if it makes even a little money, it can stay in business and perhaps reap the bonanza of a new product.

You can get our full analysis, including our clear buy/sell/hold advice, on tech stocks and dozens of other companies in the U.S. market absolutely FREE when you take a no-risk 1-month FREE trial to Wall Street Stock Forecaster today.

Your 1-month free trial also includes 5 FREE Special Reports and our weekly Email/Telephone Hotline, which keeps you up to date on changes in the U.S. market—including stocks in the fast-changing technology sector.

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Pat McKeough responds to many personal questions on stocks and other investment topics from the members of his Inner Circle. Every week, his comments and recommendations on a selection of the most intriguing questions of the past week go out to all Inner Circle members. And every Friday, we offer you one of the highlights from these Q&A sessions.

An intriguing question this week concerned one of the world’s best-known technology stocks. Cisco Systems offers leading-edge products in a highly competitive industry. Pat examined just how it plans to maintain its position in the face of rapid change and overseas competition.

Q: Could you please give me your opinion on Cisco Systems? Thank you kindly.

A: Cisco Systems Inc. (symbol CSCO on Nasdaq; www.cisco.com), is a leading maker of hardware and software that links and manages computer networks. The company’s hardware includes routers, local-area network (LAN) and asynchronous transfer mode (ATM) switches and dial-up access servers.

Cisco’s Internet Operating System (IOS) software ties these products together, delivers network services (which interconnect and move information between networks) and lets programs run across networks. Cisco gets about 46% of its revenue from overseas customers.

The company also sells home routers and networking products to consumers under the Linksys brand. Consumer products account for less than 5% of Cisco’s sales.

Cisco recently announced a major restructuring plan that includes closing its Flip camcorder operations and other underperforming businesses. In addition, Cisco will cut 9% of its workforce.

If you exclude one-time items, such as severance costs, Cisco’s earnings fell 4.3%, to $9.0 billion, in its 2011 fiscal year, which ended July 30, 2011. Revenue rose 7.9%, to $43.2 billion from $40.0 billion.

Technology stocks: Strong balance sheet contributes to product development

Cisco’s strong balance sheet will let it continue to spend heavily on product development and share buybacks. The company holds cash of $44.6 billion, or $8.20 a share. This technology stock’s $16.2 billion of long-term debt is just 15.9% of its market cap, or 1.6 times its annual cash flow of roughly $10.2 billion.

Earlier this year, Cisco started paying a quarterly dividend of $0.06 a share. The annual rate of $0.24 yields 1.3%.

You can see Pat’s recommendation on Cisco Systems in this week’s Inner Circle Q&A. In his buy-hold-sell analysis, he looks at whether the anticipated savings from Cisco’s restructuring plan will help it compete with low-cost Chinese manufacturers. He also examines the effectiveness of its research and development program as the company seeks to maintain its position in a rapidly changing and competitive industry.

Inner Circle members see Pat’s analysis and recommendations on the stocks other members have asked about in each week’s Inner Circle Q&A. You can view it immediately when you become a member of this special investment group. You will get Pat McKeough’s answers to your personal investment questions, full access to our members-only Inner Circle website, and many other membership privileges. Click here to get started right away.

(Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.)

The company continues to see strong demand for its chips from makers of smartphones and other mobile devices; Motorola and Samsung are now using Nvidia’s new Tegra chips in their latest smartphones. Rising sales to mobile device makers are also offsetting slower sales of chips for desktop and notebook computers.

In its 2011 second quarter, which ended July 31, 2011, Nvidia earned $193.5 million. That’s up 306.2% from $47.6 million a year earlier. Earnings per share rose 300.0%, to $0.32 from $0.08, on more shares outstanding. Sales rose 25.3%, to $1.0 billion from $811.2 million.

The company spent $247.7 million (or 24.4% of its sales) on research in the latest quarter, up 17.6% from $210.6 million (or 26.0% of sales) a year earlier.

New products that emerge from this spending should help spur Nvidia’s sales. For example, the company is taking advantage of rising interest in 3D movies and games with new glasses that deliver brighter and sharper images than its earlier glasses.

The company has little debt, and holds cash of $2.5 billion, or $4.10 a share. That gives it plenty of flexibility to keep developing new products. Nvidia is also expanding its business by purchasing other chipmakers. For example, in June 2011 it paid $352.2 million for Icera Inc., which designs energy-efficient chips for cellphones.

Nvidia will probably earn $1.00 a share in 2011. The stock trades at just 15.0 times that figure.

Nvidia is a buy.

The company continues to add to its expertise in cloud computing, which involves storing data and software on one or more centralized servers. Users access these programs or files over the Internet, or through some other computer network.

For example, in January 2011 Teradata paid $525 million for privately held Aprimo, which uses a cloud computing model to sell software and services to over 150,000 clients. Aprimo’s products help its customers evaluate their marketing campaigns.

In April 2011, Teradata paid $259 million for the 88.8% of Aster Data Systems Inc. that it did not already own. Aster makes software that quickly organizes and analyzes large amounts of data.

Contributions from these acquisitions helped push up Teradata’s revenue by 23.6% in the three months ended June 30, 2011, to $581 million from $470 million a year earlier. Earnings rose 39.2%, to $103 million, or $0.60 a share, from $74 million, or $0.44 a share.

The company spent $41 million (or 7.1% of its revenue) on research in the latest quarter, up 13.9% from $36 million (or 7.7% of revenue) a year earlier.

Teradata’s strong balance sheet gives it lots of room to further increase its research spending and make more acquisitions.

It holds cash of $682 million, or $4.05 a share; its long-term debt of $295 million is just 3% of its market cap.

The stock has more than doubled since NCR Corp. (New York symbol NCR) spun Teradata off as a separate company in October 2007.

Teradata now trades at 26.8 times the $2.13 a share that it will probably earn in 2011. That’s still a reasonable p/e ratio in light of the fact that the company’s services help its clients cut costs. That makes them less likely to cut their spending on Teradata’s services during economic downturns.

In addition, Teradata gets 55% of its revenue from maintenance and other services. That cuts its risk.

Teradata is a buy.

In its third quarter, which ended September 2, 2011, Adobe’s earnings fell 15.2% to $195.1 million, or $0.39 a share. A year earlier, it earned $230.1 million, or $0.44 a share. Without one-time items, earnings per share would have risen 1.9%, to $0.55 from $0.54. Revenue rose 2.3%, to $1.01 billion from $990.3 million.

The company spent $181.0 million (or 17.9% of its revenue) on research in the latest quarter, up 7.6% from $168.3 million (or 17.0% of revenue) a year earlier.

The higher research spending should help Adobe better adapt its Flash technology to smartphones and tablet computers. Right now, Apple and other mobile device makers prefer competing software that uses less power.

Adobe holds cash and investments of $2.7 billion, or $5.50 a share. Its long-term debt of $1.5 billion is a low

11% of its market cap. The company’s strong balance sheet is helping it buy other companies, mainly smaller software firms. In the first nine months of fiscal 2011, it spent $107.1 million on acquisitions.

One of the companies Adobe recently bought is EchoSign, a privately held maker of software that lets users sign documents electronically. This technology has huge potential as businesses switch from paper contracts to electronic versions.

Adobe trades at a reasonable 15.1 times its forecast fiscal 2011 earnings of $1.85 a share. However, its desktop publishing and Flash products face rising competition from larger software makers.

Adobe is a hold.

Here are three tech companies that are leaders in their niche markets. Sales and earnings at all three are rising, but we see only two as buys at today’s prices.

ADOBE SYSTEMS INC. $28 (Nasdaq symbol ADBE; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 490.9 million; Market cap: $13.7 billion; Price-to-sales ratio: 3.4; No dividends paid since June 2005; TSINetwork Rating: Average; www.adobe.com) makes software that lets
computer users create, edit and share documents in the popular PDF format. As well, graphic designers use Adobe’s software to create print publications and web pages. The company also makes Adobe Flash, which lets web site developers add animation and video.

In its third quarter, which ended September 2, 2011, Adobe’s earnings fell 15.2% to $195.1 million, or $0.39 a share. A year earlier, it earned $230.1 million, or $0.44 a share. Without one-time items, earnings per share would have risen 1.9%, to $0.55 from $0.54. Revenue rose 2.3%, to $1.01 billion from $990.3 million.

The company spent $181.0 million (or 17.9% of its revenue) on research in the latest quarter, up 7.6% from $168.3 million (or 17.0% of revenue) a year earlier.

The higher research spending should help Adobe better adapt its Flash technology to smartphones and tablet computers. Right now, Apple and other mobile device makers prefer competing software that uses less power.

Adobe holds cash and investments of $2.7 billion, or $5.50 a share. Its long-term debt of $1.5 billion is a low

11% of its market cap. The company’s strong balance sheet is helping it buy other companies, mainly smaller software firms. In the first nine months of fiscal 2011, it spent $107.1 million on acquisitions.

One of the companies Adobe recently bought is EchoSign, a privately held maker of software that lets users sign documents electronically. This technology has huge potential as businesses switch from paper contracts to electronic versions.

Adobe trades at a reasonable 15.1 times its forecast fiscal 2011 earnings of $1.85 a share. However, its desktop publishing and Flash products face rising competition from larger software makers.

Adobe is a hold.

TERADATA CORP. $57 (New York symbol TDC; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 168.3 million; Market cap: $9.6 billion; Price-to-sales ratio: 4.4; No dividends paid; TSINetwork Rating: Average; www.teradata.com) makes computers and software that capture and store large amounts of a business’s data, including its sales and inventory. Teradata then analyzes this information and identifies buying habits and trends. This helps its clients make better business decisions.

The company continues to add to its expertise in cloud computing, which involves storing data and software on one or more centralized servers. Users access these programs or files over the Internet, or through some other computer network.

For example, in January 2011 Teradata paid $525 million for privately held Aprimo, which uses a cloud computing model to sell software and services to over 150,000 clients. Aprimo’s products help its customers evaluate their marketing campaigns.

In April 2011, Teradata paid $259 million for the 88.8% of Aster Data Systems Inc. that it did not already own. Aster makes software that quickly organizes and analyzes large amounts of data.

Contributions from these acquisitions helped push up Teradata’s revenue by 23.6% in the three months ended June 30, 2011, to $581 million from $470 million a year earlier. Earnings rose 39.2%, to $103 million, or $0.60 a share, from $74 million, or $0.44 a share.

The company spent $41 million (or 7.1% of its revenue) on research in the latest quarter, up 13.9% from $36 million (or 7.7% of revenue) a year earlier.

Teradata’s strong balance sheet gives it lots of room to further increase its research spending and make more acquisitions.

It holds cash of $682 million, or $4.05 a share; its long-term debt of $295 million is just 3% of its market cap.

The stock has more than doubled since NCR Corp. (New York symbol NCR) spun Teradata off as a separate company in October 2007.

Teradata now trades at 26.8 times the $2.13 a share that it will probably earn in 2011. That’s still a reasonable p/e ratio in light of the fact that the company’s services help its clients cut costs. That makes them less likely to cut their spending on Teradata’s services during economic downturns.

In addition, Teradata gets 55% of its revenue from maintenance and other services. That cuts its risk.

Teradata is a buy.

NVIDIA CORP. $15 (Nasdaq symbol NVDA; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 603.7 million; Market cap: $9.1 billion; Price-to-sales ratio: 2.4; No dividends paid; TSINetwork Rating: Average; www.nvidia.com) develops 3D graphics chips and related technology for computers, gaming consoles and other devices. The company’s chips make computer games run more smoothly and appear more lifelike. Nvidia focuses on design, and outsources production to other chipmakers.

The company continues to see strong demand for its chips from makers of smartphones and other mobile devices; Motorola and Samsung are now using Nvidia’s new Tegra chips in their latest smartphones. Rising sales to mobile device makers are also offsetting slower sales of chips for desktop and notebook computers.

In its 2011 second quarter, which ended July 31, 2011, Nvidia earned $193.5 million. That’s up 306.2% from $47.6 million a year earlier. Earnings per share rose 300.0%, to $0.32 from $0.08, on more shares outstanding. Sales rose 25.3%, to $1.0 billion from $811.2 million.

The company spent $247.7 million (or 24.4% of its sales) on research in the latest quarter, up 17.6% from $210.6 million (or 26.0% of sales) a year earlier.

New products that emerge from this spending should help spur Nvidia’s sales. For example, the company is taking advantage of rising interest in 3D movies and games with new glasses that deliver brighter and sharper images than its earlier glasses.

The company has little debt, and holds cash of $2.5 billion, or $4.10 a share. That gives it plenty of flexibility to keep developing new products. Nvidia is also expanding its business by purchasing other chipmakers. For example, in June 2011 it paid $352.2 million for Icera Inc., which designs energy-efficient chips for cellphones.

Nvidia will probably earn $1.00 a share in 2011. The stock trades at just 15.0 times that figure.

Nvidia is a buy.

Earnings rose 17.4%, to a record $3.5 billion from $3.0 billion. During the quarter, Intel bought back $4.0 billion of its shares. Because of fewer shares outstanding, earnings per share rose 25.0%, to $0.65 from $0.52. The company spent 15.0% of its revenue on research in the latest quarter, so it’s more profitable than it seems.

Intel is a buy.

ACI has just bought S1 Corp. for $540 million in cash and stock. S1 sells transaction software for banks, credit unions, retailers and other processors. The company has over 3,000 clients worldwide.

In the three months ended June 30, 2011, ACI’s revenue rose 22.7%, to $113.4 million from $92.4 million a year earlier. The company earned $9.8 million, or $0.29 a share, compared to a loss of $150,000, or nil per share. ACI holds cash of $170.8 million, or $4.98 a share.

ACI spends a high 21% of its revenue on research (including $23.8 million in the latest quarter). That will let it keep offering the most advanced transaction-processing software. It is also in a good position to profit as more consumers switch from cash and cheques to credit and debit cards.

The company holds cash of $170.8 million, or $4.98 a share, and is debt free. The stock trades at 22.9 times forecast 2011 earnings of $1.24 a share. That’s reasonable in light of its strong growth prospects.

ACI Worldwide is a buy.

SYMANTEC CORP. $17.99 (Nasdaq symbol SYMC; TSINetwork Rating: Average) (1-408-517-8000; www.symantec.com; Shares outstanding: 765.0 million; Market cap: $13.8 billion; No dividends paid) makes software that protects computers from viruses and intruders, including the popular Norton anti-virus program. It also sells products and services to businesses, such as e-mail filtering, software and services for data backup and protection. As well, the company offers data-archiving software that helps its clients meet increasingly strict regulatory and compliance regulations.

In the three months ended July 1, 2011, Symantec’s earnings rose 6.8%, to $172 million from $161 million a year earlier. Earnings per share rose 10.0%, to $0.22 from $0.20, on fewer shares outstanding. If you exclude unusual items, mainly asset writedowns and restructuring costs, earnings per share would have risen 14.3%, to $0.40 from $0.35.

Sales rose 15.4%, to $1.65 billion from $1.43 billion. The company gets 52% of its sales from overseas. If you disregard the positive impact of exchange rates, sales would have risen 9% in the latest quarter.

Symantec continues to grow quickly, mainly by buying other software firms. For example, earlier this year it paid $390 million for Clearwell Systems Inc., a maker of legal software that helps businesses back up and secure sensitive electronic files, including emails.

Rising concerns about data security continue to push up sales of the company’s software. Demand will likely keep rising as more businesses switch to cloud computing. That’s where data and software is kept on central servers that users access over the Internet.

Symantec is a buy.