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All Contents © 2018The Kiplinger Washington Editors
By Tom Taulli
| July 13, 2017
Tech stocks are simply head-and-shoulders better than the rest of the market right now. While the S&P 500 has put together a laudable performance at 9% year-to-date, the Technology Select Sector SPDR Fund (XLK) and Vanguard Information Technology ETF (VGT) are each up about 16% just a bit past 2017’s midway point.
While some of the sector’s best stocks — such as Square Inc. (SQ), up more than 80% year-to-date — are working on doublers in just under seven months, dozens of large-cap tech names are tearing the cover off the ball, posting 20% and 30% gains in just a short time.
Will these winners continue their run? Is it time to look at some of the underloved companies? Are some hot companies about to fall on their face?
Yes, yes and yes.
We’re likely to see a mix of success from the tech space — some names are overheated right now, but some of the best tech stocks can ride momentum for years before cooling off. Just look at the performances in Amazon.com, Inc. (AMZN) and Nvidia Corporation (NVDA) over the past few years. Still, there’s plenty of risk at jumping into a tech stock right before the momo train crashes and suffering double-digit losses in the blink of an eye.
My suggestion? Stay diversified, for one, and make sure you’re picking stocks with these potential risks in mind. Today, I’ll point you in the direction of five of the best tech stocks to buy right now — picks that should either continue their momentum or finally get some much-deserved attention through the rest of 2017 and beyond — as well as five sector plays that you should cash out of sooner, not later.
Prices and data are from the original InvestorPlace story published on July 12, 2017. Click on ticker-symbol links in each slide for current prices and more.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
Dividend yield: N/A
Facebook Inc. (FB) is far from perfect, suffering issues connected to user-generated content, and realizing quickly that the Oculus VR virtual reality system isn’t quite the explosive X-factor they (and many investors) thought it would be — at least not yet.
But these worries are minor compared to Facebook’s successes and potential.
Facebook continues to grow at a hefty clip, boasting a 49% revenue jump (to $8.03 billion) in its most recent quarter and profits of $3.06 billion, a 76% spike. That’s all built on Facebook’s outstanding ability to crank out user growth, which recently has put its user base over the 2 billion (monthly active user) mark. Thanks to this scale and rich demographic data, FB has gobbled up an outsize portion of the online ad opportunity.
But Facebook isn’t running out of levers to pull to propel growth. Its WhatsApp and Instagram apps are both growing users rapidly and are still in the early phases of monetization.
Messenger is fascinating prospect with quite a bit of potential (though not as much attention as it deserves). As seen at the F8 conference, FB has plans to target the massive local commerce market with Messenger, which sports 1.2 billion MAUs and 70 million business pages. This week, in fact, Facebook announced it will roll out ads in Messenger.
How big is the opportunity? Consider this statement from CEO Mark Zuckerberg in 2014: “Messaging is one of the few things that people do more than social networking.”
Snap Inc. (SNAP) broke below its initial offering price this week. That’s not a fatal occurrence for a recent IPO, but it is a red flag.
Snap is battling mighty Facebook, which has effectively leveraged its Instagram property to hijack Snapchat’s features. And it’s working, as Snap’s social platform is quickly losing steam. During its latest quarter, daily active users grew by only 36% to 166 million. This missed Street estimates of 167.3 million and compared to a 100% rate for the prior year.
The top line, which sagged below consensus views, also suffered as a result.
Another problem is Snap’s lockup expiration, which comes at the end of July. Roughly 1.2 billion insider shares will be freed up for sale. This doesn’t guarantee a huge dump of stock, but in light of recent weakness, I expect a good round of selling; employees won’t want to miss out on what profits they can lock in.
Even one of Snap’s underwriters, Morgan Stanley, has gone negative on the stock. Analysts at the firm recently slashed their price target on SNAP stock $28 to $16 … and noted intense competitive threats from Facebook.
Micron Technology, Inc. (MU) has been in bull mode for a couple of years now, and it’s hard to find signs that the momentum is in any real danger.
Micron’s latest earnings report showed revenues soaring by 92% to $5.57 billion, and more importantly, net income that came to $1.6 billion. That’s a big flip from a $215 million loss during the year-ago period!
You can thank the strong strategies coming out of Micron’s C-suite. The most important move has been diversifying away from the PC business; MU now has thriving segments including mobile, networking and embedded systems. That makes Micron a great way to play megatrends like the Internet of Things and automotive technologies, because no matter who wins on the product side, Micron’s likely going to play a part in their innards.
What I like about Micron at the moment is its MU stock is also trading at a dirt-cheap valuation. The forward price-to-earnings multiple is a mere 5 on profits that are expected to jump 28%!
Dividend yield: 3.8%
The mobile revolution continues to grow at a healthy rate. But one of the leaders in this category — Qualcomm, Inc. (QCOM) — is missing out.
It’s not because Qualcomm lacks innovation and R&D. The real problem is that QCOM’s business model, which relies on licensing its technologies. The complaint? Its arrangements are just too expensive.
QCOM has been the target of multiple legal challenges from South Korea, the European Union and the United States, and every time one of them pops up, the potential consequences are severe. But perhaps Qualcomm’s biggest challenge is from Apple Inc. (AAPL), where CEO Tim Cook has made clear his disdain for the comm-tech firm’s practices and has launched a $1 billion lawsuit to fight back.
Litigation could take years, but that means an overhang of uncertainty for QCOM, who gets 80% of its pretax profits from the licensing business.
Yelp Inc. (YELP) is a useful service with a pretty strong brand name. But these factors might not be enough given the competitive environment.
Alphabet Inc. (GOOGL) has been making a play for the review market, and Facebook is doing the same. There’s also IAC/InterActiveCorp (IAC), which has agreed to purchase Angie’s List Inc. (ANGI) and crowd the space.
These companies are taking a toll on Yelp, which posted horrible results in its latest quarter. Revenues climbed 24% to miss expectations, the net income line was red and the company provided tepid guidance.
Expect the deceleration to continue. Full-year revenues are forecast to range from $850 million to $865 million, while Wall Street pros were looking for a much more robust $888.7 million.
Could Yelp be bought out? Maybe, but that’s a dicey wager. As seen by other troubled digital companies such as Groupon Inc. (GRPN), tech “bargains” can keep getting cheaper but fail to bring in a serious buyer.
Dividend yield: 0.8%
Research firm IDC says the robotics market is expected to see strong long-term growth, forecasting spending to double by 2020 to a staggering $188 billion.
A good way to play this trend is Teradyne, Inc. (TER). Through an acquisition of Universal Robots (UR) in 2015, TER has become a dominant player in the category. The focus is on one of the hottest parts of the market — collaborative robots, sometimes called “cobots.” These are low-cost systems that assist production (things like packing, assembly, gluing and polishing).
In its latest quarter, Teradyne’s robot segment reported a 117%-plus increase in revenues to $19.6 million. And this opportunity is just in the early innings. Says CEO Mark Jagiela:
“UR continues to reshape how companies think about industrial automation … The universal nature of our human scale cobots makes the breadth of applications nearly limitless. We are regularly surprised by the new uses customers have for their cobots.”
The internet in China remains a strong growth opportunity. By 2022, the country’s middle class is expected to hit 600 million, compared to just 320 million people in the U.S. The e-commerce market is expected to explode, too, with spending forecast to shoot from $470 billion this year to nearly $840 billion by 2021.
The best way for American investors to capitalize is via Alibaba Group Holding (BABA). The company has roughly 454 million active buyers on its retail marketplaces and 507 million monthly active users (MAUs) on its mobile platforms.
However, Alibaba is more than just e-commerce. The company has invested heavily in leveraging its digital platforms into other growth areas like entertainment, cloud computing and payments. BABA also has made smart investments in things such as social platform operators Weibo Corp (WB) and Momo Inc. (MOMO).
Expect the traction to continue for some time. Alibaba recently reported a nice increase to its guidance for fiscal 2018, with revenues expected to increase by 45%-49%, clobbering still-robust expectations for 36% growth.
Twilio Inc. (TWLO) was actually a tech darling until recently.
Back in early 2008, the company launched a cloud service that made it easy for companies to add communications services to their mobile apps, and breakneck growth followed.
However, during the past year or so, things have become considerably more difficult. The competitive environment has become more intense, including Cisco Systems, Inc. (CSCO), Vonage Holdings Corp.’s (VG) Nexmo, CallFire and Bandwidth.com. Perhaps the most threatening competitor, though, is Amazon, which has launched its own suite of communications cloud services.
Another big-time problem? Twilio has serious customer concentration; Uber accounts for about 12% of revenues, while Facebook’s portion is roughly 9%. And Uber has been reducing expenditures; during Q4, Uber was actually 17% of revenues. If this trend continues — and the way Uber is going, it appears that will be the case — TWLO will have a hard time maintaining strength on the top line.
Despite all this trouble, Twilio shares still fetch a too-lofty valuation of about 9 times sales.
Dividend yield: 2.2%
Microsoft Corporation (MSFT) may be more than 40 years old, but the company has been acting like a scrappy startup of late.
Microsoft’s aggressive moves into the cloud have turned Mister Softee into the No. 2 player in the industry, Amazon, with its Amazon Web Services. During the latest quarter MSFT’s Azure cloud platform posted a 93% surge in revenues, with the Commercial Cloud business on track for $15.2 billion in annual revenues.
The success should not be a surprise. Microsoft has the right assets to be a dominant operator in the cloud, such as a trusted brand, a global infrastructure, a massive customer base and an ecosystem of millions of developers. The company also has retooled legacy systems like Windows, SQL Server and Office. And MSFT has made spot-on acquisitions such as LinkedIn, mobile app company Xamarin and IoT leader Solair.
Dividend yield: 3.7%
Back in May, Warren Buffett’s Berkshire Hathaway Inc. (BRK.B) sold a third of his stake in International Business Machines Corp. (IBM). He said:
“I don’t value IBM the same way that I did six years ago when I started buying. I think if you look back at what they were projecting and how they thought the business would develop, I would say what they’ve run into is some pretty tough competitors.”
I think Uncle Warren should’ve sold all of Berkshire’s shares.
IBM is a shrinking company that has not been able to transition effectively from its legacy technologies. Revenues have declined for 20 consecutive quarters, and the only thing the company seems good at is cutting costs to keep its cash flows humming. But if it can’t regain its core business or driving something new, the bottom line ultimately will suffer.
To its credit, IBM has invested in cutting-edge technologies such as artificial intelligence and IoT, but those categories are still in their early stages and can’t pick up the slack fast enough.
IBM is restructuring its existing business by moving aggressively towards mobile and the cloud. But so far, its efforts seem to be too little, too late.
This article is from Tom Taulli of InvestorPlace. As of this writing, he held none of the aforementioned securities.
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