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All Contents © 2019The Kiplinger Washington Editors
By Harriet Lefton, Contributing Writer
| January 30, 2019
Earnings season is here, and the technology sector is entering the spotlight. Tech stocks will be reporting over the next few weeks, and based on some omens from the first few results, it could be ugly. For instance, Nvidia (NVDA) has thrown up yet another profit warning, citing weakening conditions in China, among other things. And Apple (AAPL) just reported its first decline in both sales and profits for a holiday quarter in the iPhone era.
Every company has the potential to deliver a surprise announcement that catches the market off-guard. The key is identifying the ones likeliest to please Wall Street. So, which tech stocks are primed to outperform this quarter?
RBC Capital’s Mark Mahaney (Track Record & Ratings) is a Top 30 analyst among the 5,000-plus analysts ranked by TipRanks. He has an impressive 65% success rate and 21.3% average return. And he has released a report setting out his expectations for top technology stocks going into the print.
Here are the best tech stocks to buy before earnings, based on the bullish expectations of Mahaney and RBC. But these aren’t just earnings plays, nor are quarterly results make-or-break moments for these companies. All five stock picks are top ideas in general that boast serious growth potential for 2019 and beyond.
Data is as of Jan. 29, 2019. Stocks are listed in alphabetical order.
Market value: $657.2 billion
TipRanks consensus rating: Strong Buy
Earnings release: Feb. 4, after the close
Alphabet (GOOGL, $945.00) is looking very appealing as we head into the company’s early-February report. Shares are currently trading within 10% of its 52-week lows.
In his earnings preview, RBC Capital’s Mark Mahaney describes GOOGL as a “top large cap long for 2019,” explaining that the stock benefits from “extremely consistent Fundamental Trends, and with pole position against arguably the biggest product cycle in Tech – autonomous vehicles.”
By the numbers, Mahaney is looking for gross revenues of $38.90 billion, net revenues of $31.41 billion, fueling GAAP (Generally Accepted Accounting Principles) operating income of $8.64 billion and GAAP earnings of $11.03 per share.
Drilling down, Core Google gross revenue (the vast majority of Alphabet’s business) should improve 20% year-over-year to $38.72 billion, and Core Google net revenues should hit $31.23 billion (up 21% year-over-year). This performance would be driven by ongoing strength in Mobile Search, YouTube and Programmatic.
“The largest Ad Revenue-based ‘Net business has averaged 23% growth for 35 (keep counting ‘em) straight quarters & shows no signs of slowing,” Mahaney cheers, “despite a $130 billion revenue run-rate.” Plus, Alphabet has more than $100 billion in cash and short-term investments – dry powder that Mahaney says should give investors extra confidence amid market turbulence.
RBC currently has an “Outperform” (equivalent of “Buy”) rating and a $1,400 price target, implying 45% upside from here. Better still, it's one of the top stock picks of the broader analyst community. If you’re interested in more information on Alphabet’s shares, get a free GOOGL Research Report from TipRanks.
Market value: $779.4 billion
Expected earnings release: Jan. 31, after the close
As Amazon.com’s (AMZN, $1,593.88) annual holiday press release revealed, the company enjoyed another record-breaking holiday shopping season in 2018.
Several brick-and-mortar retailers continued to suffer, and Amazon reaped the rewards as consumers continued shifting their shopping behavior to the internet. The company reported “tens of millions” of new Prime trials/memberships globally, while customers’ use of Alexa for shopping more than tripled year-over-year.
“We believe AMZN exceeded its domestic gross profit estimates on strong macro holiday sales and continued share gains, supported by Adobe Insights and Similarweb,” Mahaney writes. The five-star analyst has an AMZN price target of $2,300 (44% upside potential), and in fact, RBC says this tech large cap has the least risk heading into earnings.
For the December quarter, Mahaney expects $70.9 billion in revenues, $3.5 billion in GAAP operating income and $5.49 in GAAP EPS. He also expects big growth out of Amazon Web Services, the company’s rapidly expanding cloud segment, modeling in 42% year-over-year growth to $7.3 billion in sales. Gartner currently estimates AWS’s worldwide market segment share at 51.8%, which is larger than the next four competitors combined.
Mahaney points out that the company has put together 65 straight quarters (with one exception) of 20%-plus organic revenue growth, and while profit has been uneven, it’s been uneven on the right side. That’s “thanks to the best revenue mix shift story in tech – i.e. AMZN’s fastest growing businesses (AWS and AMS) are high-margin.” Find out more from TipRanks in its AMZN Research Report.
Market value: $9.4 billion
Expected earnings release: Feb. 21, after the close
Dropbox (DBX, $23.24) offers a compelling combination: internet scalability with software-as-a-service (SaaS) predictability.
“Each quarter, we have become increasingly impressed with DBX’s business and financial model,” the RBC analyst writes to investors. “Best of breed (free cash flow) margins (33% in Q3) coupled with robust, consistent revenue growth.”
This trend should continue into Q4. The internet data storage company is guiding for fourth-quarter sales of $367 million to $370 million, which would imply strong 20% to 21% year-over-year growth. And Mahaney thinks DBX can come in at the high end, estimating $370 million.
Also pay attention to user growth. While Dropbox grew paying users by 400,000 in Q3, net paid additions for Q4 are anticipated to come in at a comparatively low 200,000. But average revenue per user (ARPU) should rise 5.5% year-over-year to $119.
“Already over 50% of the Fortune 500 deploy Dropbox Business Teams in some capacity, and the company believes it has employee users in over 90% of the Fortune 500,” Mahaney writes, but adds, “If Dropbox were to materially penetrate the Enterprise market, we continue to believe the company may be able to triple its Paying User count over the medium to long term.”
Overall, the analyst is very bullish about DBX’s prospects, reflected by an “Outperform” rating and a $37 price target (60% upside potential). “We continue to see a favorable set up for the stock, given the surprising ARPU acceleration the last two quarters, which should drive robust revenue and fundamental growth trends going forward,” he concludes. Check out other analyst targets in TipRanks’ DBX Research Report.
Market value: $4.7 billion
TipRanks consensus rating: Moderate Buy
Earnings release date: Mid-February (expected)
Streaming media stock Roku Inc. (ROKU, $42.85) is among the lowest-risk plays, heading into earnings, in the mid- and small-cap space, Mahaney says. He’s optimistic about the company’s recent positive metrics release, coupled with some encouraging takeaways from a recent management meeting in Las Vegas.
ROKU released Q4 active accounts and streaming hours metrics on Jan. 4. The former came in around 27 million (up 40% YoY), and the latter hit 7.3 billion (up 68%).
Mahaney is predicting revenues of $261 million for the fourth quarter. He also recommends keeping a close eye out for Platform ARPU, which should hit $17.81 for Q4 (up 29%).
“Given a base of less than $200MM in ’17 Ad Revenue and a $70B U.S. TV Advertising market, we believe ROKU can sustain high Platform Revenue growth for several years,” Mahaney concludes. He has a $70 price target on ROKU shares right now, indicating he thinks the stock can surge more than 60% from current levels.
For further stock insights, turn to TipRanks’ ROKU Research Report.
Market value: $5.8 billion
Expected earnings release: Mid-February (Expected)
Tech stock The Trade Desk (TTD, $134.56) bills itself as a company that empowers advertising buyers. In short, it’s an online demand-side platform that provides buying tools for digital media purchasers.
It also boasts the title of RBC Capital’s top small-cap long for 2019.
Mahaney calls TTD one of the best “Crucial Combos in ‘Net Land,” in that it generates consistent 50%-plus revenue growth and 30% EBITDA margins. For the quarter, he sees revenues hitting $147 million, with adjusted EBITDA reaching $52.5 million.
The Trade Desk recently released its biggest product launch ever. Called “The Next Wave,” this launch includes a new media planner, a new user interface and a new artificial-intelligence engine. These are all designed to help its client’s better design, implement and monitor programmatic ad campaigns.
“Next Wave rollout amounts to a major product cycle that should help FY19 results, along with International expansion,” Mahaney writes. Thanks to New Wave, he thinks Wall Street’s assumption of 33% revenue growth in fiscal 2019 as reasonably conservative.
This stock has multiple drives ahead, from secular programmatic ad growth to Google GDPR (General Data Protection Regulation) issues to connected-TV growth to international expansion. As a result, the analyst’s “Outperform” rating comes with a $170 price target (26% upside potential), notably higher than the Street’s $122 average price target. You can get more analysis in TipRanks’ TTD Research Report.
Harriet Lefton is head of content at TipRanks, a comprehensive investing tool that tracks more than 5,000 Wall Street analysts as well as hedge funds and insiders. You can find more of their stock insights here.