Top Tech Stocks Poised to Benefit Most from 2014 IT Spending Growth

By Lee Jackson Updated Jun 27, 3:45PM EDT · Published Oct 18, 9:10AM EDT

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The technology analysts at Bank of America Merrill Lynch surveyed more than 175 respondents with a total information technology (IT) budgets of more than $5 billion, predominantly in the United States (87% of companies). Their survey results suggest that overall IT spending is expected to grow a tepid 0.9% in 2014. While not a stellar increase, the number may reflect very conservative corporate models due to the constant government, health care and debt ceiling issues.

Some areas are expected to see much higher growth rates. With the entire sector being surveyed, the median gain of just under 1% does not represent the fact that some areas may see double-digit percentage growth. In fact, the Merrill Lynch team was pleasantly surprised to see enterprise software net spending intentions improve from +11% to +18%, as did application software, +16% versus +13% before. The bottom line for investors is to locate the names most likely to be recipients of those larger increases. Here are some of the stocks to buy that Merrill Lynch sees garnering the larger spending increases.

Salesforce.com Inc. (NYSE: CRM) has been on fire over the past three years and has beaten short-sellers to a pulp. The company provides enterprise cloud computing solutions to various businesses and industries worldwide. Its service offerings include Sales Cloud, which enables companies to grow their sales pipelines, close deals, improve sales productivity and gain business insights, as well as Service Cloud, which enables companies to connect with their customers and address their service and support needs. The Merrill Lynch price target is $61. The Thomson/First Call target is posted at $56.50. Salesforce.com closed Thursday at $52.58.

Workday Inc. (NYSE: WDAY) is another enterprise software name that has been on fire since its IPO last fall. At the HR technology conference in Las Vegas last week, the company stole the show, according to many analysts who attended. The company’s presentation included a survey by HR consulting firm CedarCrestone, showing product adoption could more than double from 5% today to 12% in the next year. Merrill Lynch has not picked up coverage. The consensus price target for the stock is $82. Workday closed Thursday at $81.16. Hedge Fund manager Jim Chanos, who is bearish on almost everything, is actually long Workday stock.

VMware Inc. (NYSE: VMW) is expected to do extremely well in the server virtualization software area next year. The company’s solutions enable organizations to aggregate multiple servers, storage infrastructure and networks together into shared pools of capacity that can be allocated to applications as needed. Its cloud infrastructure products and technologies include its flagship data center platform, VMware vSphere. Merrill Lynch has a $106 price objective for the stock. The consensus target is at $91.50. VMware closed Thursday at $79.66.

Oracle Corp. (NYSE: ORCL) has regained leadership in the enterprise application arena and may be poised for an outstanding 2014. It also is ranked number one in the database software arena. The company announced Thursday it has acquired Compendium, a cloud-based content marketing provider that helps companies plan, produce and deliver engaging content across multiple channels throughout its customers’ lifecycles. Investors are paid a 1.5% dividend. The Merrill Lynch price target for the top tech name to buy is $38. The consensus price target is $36. Oracle closed Thursday at $33.02.

Adobe Systems Inc. (NASDAQ: ADBE) also is expected to increase its share in enterprise application. The company recently unveiled new features and functionality that extends the industry-leading capabilities of Adobe Analytics, a key element of Adobe Marketing Cloud. The upgrades are designed to significantly enhance marketers’ and data analysts’ abilities to rapidly identify and take action on critical insights for their business. New innovations include predictive analytics capabilities, advanced real-time reporting and data visualizations, video analytics advancements and powerful mobile app analytics. Merrill Lynch has a $61 target for the stock. The consensus is pegged much lower at $51. Adobe closed Thursday at $51.50.

Citrix Systems Inc. (NASDAQ: CTXS) remains the leader in the fast-growing desktop virtualization area. The company provides cloud computing solutions that enable IT and service providers to build private and public clouds worldwide. The company operates in two divisions, Enterprise and Online Services. The Merrill Lynch price target for this top stock to buy at most Wall Street firms is $84. The consensus is considerably lower at $75. Citrix closed Thursday at $57.15.

Microsoft Corp. (NASDAQ: MSFT) also has a sizeable share of the desktop virtualization pie. With a new CEO expected to be announced within six months, Wall Street is expecting a dynamic shift to emerge as the company fights to be relevant again. Investors are paid a solid 3.3% dividend. The Merrill Lynch price target for the Neutral-rated company is $36, while the consensus is placed at $35. Microsoft closed Thursday at $34.64.

Red Hat Inc. (NYSE: RHT) provides open source software solutions primarily to enterprise customers worldwide. The company develops and offers operating system, middleware, virtualization, storage and cloud technologies. The stock remains a favorite of CNBC’s Jim Cramer, and it is expected to show strong sales gains the rest of this year and into 2014. The Merrill Lynch price target is $61. The consensus target is set lower at $58. Red Hat closed Thursday at $43.60.

One area that again continues to lose market share and investment dollars is desktop PCs. The Merrill Lynch research indicates that PCs are clearly the least favored technology among corporations today, while laptop net spending is expected to be flat. That number is up from -5% in March. This would not bode well at all for Dell Inc. (NASDAQ: DELL) and Hewlett-Packard Co. (NYSE: HPQ).

The recent drama in Washington has forced many corporations to keep a lid on their spending, and who can blame them? Dysfunctional politicians that refuse to address our country’s skyrocketing debt do not really calm the nerves of executives looking to expand their businesses. One positive for the future is that there are voices in Washington looking to change the budget and debt theatrics. Any positive change in tone and direction could help increase confidence and boost spending.

About the Author Lee Jackson →

Lee Jackson has covered Wall Street analysts' equity and debt research and equity strategy daily for 24/7 Wall St. since 2012. His broad and diverse career, which included a stint as the creative services director at the NBC affiliate in Austin, Texas, gives him unique insight into the financial industry and world.

Lee Jackson's journey in the financial industry spans over 30 years, with nearly two decades as an institutional equity salesperson at Bear Stearns, Lehman Brothers, and Morgan Stanley. His career was marked by his presence on the sell side during pivotal Wall Street events, from the dot.com rise and bubble to the Long Term Capital Management debacle, 9/11, and the Great Recession of 2008. This is a testament to his resilience and adaptability in the face of market volatility.

Lee Jackson’s practical financial industry experience, acquired from a career at some of the biggest banks and brokerage firms, is complemented by a lifetime of writing on various platforms. This unique combination allows him to shed light on the intricacies and workings of Wall Street in a way that only someone with deep insider experience and knowledge can. Moreover, his extensive network across Wall Street continues to provide direct access for him and 24/7 Wall St., a privilege few firms enjoy.

Since 2012, Jackson’s work for 24/7 Wall St. has been featured in Barron’s, Yahoo Finance, MarketWatch, Business Insider, TradingView, Real Money, The Street, Seeking Alpha, Benzinga, and other media outlets. He attended the prestigious Cranbrook Schools in Bloomfield Hills, Michigan, and has a degree in broadcasting from the Specs Howard School of Media Arts.