Technology

Cowen Has 3 Telecom Tech Stocks With Big 2016 Upside Potential

Lee Jackson

Published: November 18, 2015 9:50 am

Last Updated: January 13, 2020 5:04 pm

The ever-increasing demand for storage, bandwidth, latency and more continues to be driven by the huge surge in mobile computing and streaming content. Everybody from senior citizens to kids are on smartphones, devouring everything the Internet has to offer. Unlike with many technology areas that are red hot and then cool off, all investors have to do is take a look around to see what’s going on here.

In a new research report, Cowen shuffles its top pick stocks in the telecom sector. We focus on two that are telecom tech leaders and a third that posted outstanding third-quarter numbers and had a solid bounce higher. All are rated Outperform and all could bring patient aggressive investors outstanding returns.

Zayo Group

This company had a well-received initial public offering (IPO) this time last year and it is the top pick at Cowen. Zayo Group Holdings Inc. (NYSE: ZAYO) provides comprehensive bandwidth infrastructure services in over 300 markets throughout the United States and Europe.

Zayo delivers a suite of dark fiber, mobile infrastructure, and cloud and connectivity services to wireline and wireless customers, data centers, Internet content providers, high-bandwidth enterprises and government agencies across its robust 82,000 route mile network. The company also offers 45 carrier-neutral data center facilities across the United States and France. Zayo was the first to offer bandwidth shopping and buying in under two minutes through Tranzact.

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Several Wall Street firms love the strong defensive business model and cite the company’s solid growth trajectory, the highly recurring revenue model, high incremental EBITDA margins, management’s experience and ability to drive high returns on invested capital. Like others in the sector, Zayo’s favorable multiyear secular tailwinds, as well as the increased probability of a real estate investment trust (REIT) structure over the long term make it a solid buy for investors now.

Wall Street analysts have stressed that investors focus on the long term for the company, given quarter-to-quarter volatility with bookings. In addition, Zayo has been active in acquiring smaller complimentary companies, and the analysts feel that fiscal 2017 estimates may be too low.

The Cowen price target for the stock is $37, and the Thomson/First Call consensus price target is $31.63. Shares closed on Tuesday at $23.91.
Level 3 Communications

Cowen moved this company to the number two position of its top high conviction picks. Level 3 Communications Inc. (NYSE: LVLT) provides local, national and global communications services to enterprise, government and carrier customers. The company serves customers in more than 500 markets in over 60 countries over a global services platform anchored by owned fiber networks on three continents and connected by extensive undersea facilities.

Level 3’s comprehensive portfolio of secure, managed solutions includes fiber and infrastructure solutions; IP-based voice and data communications; wide-area Ethernet services; video and content distribution; and data center and cloud-based solutions.

While the company reported better-than-expected third-quarter numbers, Cowen feels that growth should continue in the fourth quarter. The firm reset numbers in line with management guidance, but continues to believe that the current entry point for the stock is very compelling, and the long-term thesis for the company remains unchanged. Cowen also feels the company may address a stock buyback plan next year.

The $64 Cowen price target is higher than the consensus target of $60.33. Shares closed on Tuesday at $50.76.

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Rackspace Hosting

This top stock has been cut almost in half from highs posted earlier this year and investors may have an awesome entry point at current levels. Rackspace Hosting Inc. (NYSE: RAX) is the self-described number one managed cloud company. It helps businesses tap the power of cloud computing without the challenge and expense of managing complex IT infrastructure and application platforms on their own. Rackspace engineers deliver specialized expertise on top of leading technologies developed by AWS, Microsoft, OpenStack, VMware and others, through a results-oriented service known as Fanatical Support.

Rackspace reported very solid third-quarter results, including revenue and EBITDA that beat Wall Street expectations, largely driven by some previously announced enterprise business that was pushed into the third quarter and slightly higher seasonal growth within its public cloud business. The company also reaffirmed 2015 revenue and EBITDA margin guidance, but it did narrow fourth-quarter revenue growth guidance due to the better-than-expected numbers posted in the third quarter.

The Cowen price target is a whopping $52, while the consensus target is much lower at $39.47. Shares closed Tuesday at $26.17.

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The demand for fiber, storage, delivery and latency is only going to increase. With Alphabet making a huge push into programming and the ISP world with its Google Fiber, plus major carriers increasing Internet speeds, the need will only increase. Cowen’s top stocks to buy should be right there when more orders continue to roll in.