Merrill Lynch Has 4 Specialty Tech Stocks With Huge Upside Potential

By Lee Jackson Updated Jan 13, 2:43PM EST · Published Jan 22, 10:05AM EST

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Merrill Lynch Has 4 Specialty Tech Stocks With Huge Upside Potential — © Courtesy of Fitbit Inc.

Wow, Thursday sure felt good for suffering stock investors, and Friday may even be better. The question is if we are indeed out of the woods, or is this just some massive short covering prior to the next leg down. One thing that volatility provides aggressive accounts with dry powder is the chance to hop in and snag stocks on sale that could have big upside when the market resumes an upward trend.

We screened the Merrill Lynch research database looking for some specialized tech stocks that were on sale. We found four companies that have outstanding franchises, cutting edge products or services, a very reasonable entry point and, of course, are rated Buy at Merrill Lynch. It is important to note that these are only suitable very risk-tolerant accounts.

Barracuda Networks

This small-cap play could have outstanding upside for aggressive accounts. Barracuda Networks Inc. (NYSE: CUDA) provides cloud-connected security and storage solutions that simplify IT. These powerful, easy-to-use and affordable solutions are trusted by more than 150,000 organizations worldwide and are delivered in appliance, virtual appliance, cloud and hybrid deployments. Barracuda’s customer-centric business model focuses on delivering high-value, subscription-based IT solutions that provide end-to-end network and data security.

The stock was absolutely crushed after Barracuda reported third-quarter numbers that badly missed analyst estimates. Some analysts’ biggest concern is that customers are moving to the public cloud, and that could be the greatest threat to the company as many of applications are provided by public cloud providers as part of the service contracts.

Merrill Lynch sees the company as disruptive as it provides low-cost, easy to use technology, has a consumer-like marketing strategy and a direct sales process, and lastly a subscription business model that translated to significant recurring revenues. The company is also a very viable takeover candidate.

The Merrill Lynch price target for the stock is $20, and the Thomson/First Call consensus target $19.38. The stock closed most recently at $10.32.
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Fitbit

This company had one of the hottest IPOs of 2015, but the stock has been hammered. Fitbit Inc. (NYSE: FIT) is leading a worldwide movement toward healthier, more active lives by empowering people with data, inspiration and guidance to reach their goals.

The Fitbit platform combines connected health and fitness devices with software and services, including an online dashboard and mobile apps, data analytics, motivational and social tools, personalized insights and virtual coaching through customized fitness plans and interactive workouts. The platform helps people become more active, exercise more, sleep better, eat smarter and manage their weight. Fitbit appeals to a large, mainstream health and fitness market by addressing these key needs with advanced technology embedded in simple-to-use products and services.

The company has already sold over 20.8 million devices since inception. Merrill Lynch remains very positive on the stock and thinks the connected health/fitness market is in the early growth stages and the company is rapidly gaining share. Some Wall Street analysts see the company increasing unit and average-selling-price growth with a platform approach. In addition, a deeper international push, combined with corporate wellness adoption, should help grow revenues an estimated 83% this year and conservatively almost 30% next year.

The $36 Merrill Lynch price target is lower than the consensus estimate of $40.25. The stock closed Thursday at $18.19.
Pure Storage

This looks to be offering investors a big upside in flash storage. Pure Storage Inc. (NYSE: PSTG) offers customers disruptive, software-driven storage technology combined with a customer-friendly business model drives business and IT transformation for customers through dramatic increases in performance and efficiency at lower costs.

Pure Storage FlashArray//m is simpler, faster and more elegant than any other technology in the data center. FlashArray//m is ideal for the move toward big data and for performance-intensive workloads such as cloud computing, database systems, desktop virtualization, real-time analytics and server virtualization.

The company reported earnings for the first time as a public company with its fiscal third quarter that ended on Oct. 31. Revenue of $131.4 million was up a spectacular 167% from the year-earlier period, and an operating loss of $55.6 million, or -0.18 per share, beat consensus of $107.3 million, -$0.31 per share.

Merrill Lynch has a whopping $22 price target, and the consensus target is $20.53. Shares closed at $13.27.

Rackspace Hosting

This stock has been almost cut in half from highs posted last 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, helping businesses tap the power of the cloud without the challenge and expense of managing complex IT infrastructure and application platforms on their own. Its engineers deliver specialized expertise on top of leading technologies developed by AWS, Microsoft, OpenStack, VMware and others, through a results-obsessed service known as Fanatical Support.

Rackspace reported very solid third-quarter results, including revenue and EBITDA that beat Wall Street expectations. The solid numbers were 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 EBITDA margin guidance, but it did narrow fourth-quarter revenue growth guidance due to the better-than-expected numbers in the third quarter.

The Merrill Lynch $38 price target is near the consensus target of $38.22. The shares closed Thursday at $18.31.
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All these companies have established franchises and strong product lines. They have all been battered in the sell-off and are offering aggressive investors not only solid entry points, but are priced at levels at which more shares can be bought, to add to upside potential.

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.