Technology

Large Cap Giants Dominate Baird Top Tech Ideas for 2017

Lee Jackson

Published: January 12, 2017 8:50 am

Last Updated: January 12, 2020 3:56 pm

With 2016 and the holidays now in the rear-view mirror, many investors are focused on ideas for 2017 and making the changes they feel will help lend a hand toward continued gains. One thing is for sure, the market is a lot more expensive than it was this time last year, and the going could be a touch more difficult. While the Trump rally has been solid, and hopes are high for an improving economy, it still makes sense to stay with market leaders.

In a recent research report, the analysts at Baird offered with their top ideas for 2017. It is an eclectic and solid group, many of which are small or mid-cap companies, as that is a research niche the company excels in. However, when it came to technology this year, the firm went large cap with five of their top picks, all of which make good sense for growth portfolios with more risk tolerance.

Alphabet

The search giant continues to expand and is even working on a driverless car now. Alphabet Inc. (NASDAQ: GOOGL) provides online advertising services in the United States, the United Kingdom and rest of the world. It offers performance and brand advertising services, and it operates through Google and Other Bets segments. The Google segment includes principal internet products, such as Search, Ads, Commerce, Maps, YouTube, Apps, Cloud, Android, Chrome and Google Play, as well as technical infrastructure and newer efforts, such as virtual reality.

The Google segment also sells hardware products, comprising Chromecast, Chromebooks and Nexus. The Other Bets segment includes businesses such as Access/Google Fiber, Calico, Nest, Verily, GV, Google Capital, X and other initiatives.

The Baird team cite the company’s innovation in machine learning and artificial intelligence, which they feel can support the core search business and is now being applied across all the company’s growth initiatives. They also point to Google Cloud, which is the largest cloud infrastructure and engages in more technology, infrastructure research and development in headcount and dollars than any other company. This gives the company the strength and wherewithal to compete and differentiate itself from Amazon AWS and Microsoft’s Azure.

The Baird price target for the stock is $930. The Wall Street consensus price objective is $968.75. Shares closed Wednesday at $829.86.

Apple

This technology giant had a wild 2016 and is still down over 10% from highs posted in the spring of 2015. Apple Inc. (NASDAQ: AAPL) revolutionized personal technology with the introduction of the Macintosh in 1984, and it is among the leaders in the world in innovation with the iPhone, iPad, Mac, Apple Watch and Apple TV.

Apple’s four software platforms — iOS, OS X, watchOS and tvOS — provide seamless experiences across all Apple devices and empower people with breakthrough services, including the App Store, Apple Music, Apple Pay and iCloud.

Apple shares have shown a nice move in the Trump rally but volatility has crept into the stock. Top analysts have noted that the iPhone 7 family performed much better than the prior model, and there is big consumer interest in iPhone 8. They also stress that the company remains committed to its capital allocation program, and Baird sees the possibility for not only an increase in the dividend but continued share buybacks.

Baird also thinks the iPhone 8 opportunities are solid and, like others, feels the product will have significant upgrades. Toss in the easier comparisons and the strong average selling prices, and the new phone is a distinct positive going forward this year.

Baird also stresses the benefit from lower taxes and more so the cash repatriation, given Apple’s $238 billion cash reserve, 91% of which is offshore. Both President-elect Trump and Congress have indicated they want to lower the tax rate on repatriating cash to the United States, with some seeing the rated dropped to as low as 8% to 10%.

Apple investors receive a 1.9% dividend. Baird has a $133 price target. The consensus target is $132.96, and shares closed on Wednesday at $119.75.

Cisco

This is another top mega-cap technology stock pick at Baird for 2017. Cisco Systems Inc. (NASDAQ: CSCO) designs, manufactures and sells internet protocol (IP) based networking products and services related to the communications and information technology industry worldwide.

It provides switching products, including fixed-configuration and modular switches, and storage products that provide connectivity to end users, workstations, IP phones, wireless access points and servers, as well as next-generation network routing products that interconnect public and private wireline and mobile networks for mobile, data, voice and video applications. Cisco offers service provider video infrastructure, including set-top boxes, cable/telecommunications access products, and cable modems, as well as video software and solutions.

In addition, it provides collaboration products comprising unified communications products, conferencing products, telepresence systems and enterprise mobile messaging products; data center products, such as blade, rack and modular servers, fabric interconnects, software and server access virtualization solutions; security products, including network and data center security, advanced threat protection, web and email security, access and policy, unified threat management, and advisory, integration, and managed services. Other products include emerging technologies and other networking products.

Baird cites Cisco’s stellar balance sheet, and the ability for the company’s gross margins to move close to the 65% range on a consistent basis as it moves away from the legacy products sold for switching and routing. Cisco also could benefit from the tax being lowered on overseas money as it has a whopping $70 billion in cash, 90% of which is overseas.

Wall Street analysts point to an estimated double-digit bookings momentum for Cisco’s Meraki Cloud Services. Many think that Meraki is likely to be a $1 billion plus run-rate business this year, with an incredible 50% to 70% compounded annual growth rate. A jump from 40 GE to 100 GE data center switching and next generation security are also adding to the total sales profile and product mix.

Cisco investors receive a 3.45% dividend. The Baird price target is $35. The consensus target is $33.11. Shares closed Wednesday at $30.15.

Micron Technology

Micron Technology Inc. (NASDAQ: MU) is a global leader in advanced semiconductor systems. Its broad portfolio of high-performance memory technologies, including DRAM, NAND and NOR flash, is the basis for solid state drives, modules, multichip packages and other system solutions. Its memory chip solutions enable the world’s most innovative computing, consumer, enterprise storage, networking, mobile, embedded and automotive applications.

Micron and Intel announced last year the availability of their 3D NAND technology, the world’s highest-density flash memory. Flash is the storage technology used inside the lightest laptops, fastest data centers and nearly every cell phone, tablet and mobile device.

The Baird team cited three big positive for the company for 2017:

1) Lack of wafer supply for DRAM with limited new node migration.
2) Continued tightness in NAND, which they feel is driven by slower industry transition to 3D combined with an increase in enterprise SSD bit growth.
3) Price increases across NAND flash’s three key segment, along with mix improvement, all of which bode well for the company’s NAND profitability for 2017.

The $25 Baird price target is lower than the consensus target of $26.58. Shares closed Wednesday at $22.79.

Western Digital

This long-time innovator in the storage industry is a leader in the total addressable hard disk drive (HDD) market, and it posted a very positive earnings pre-announcement earlier this week. Western Digital Corp. (NASDAQ: WDC) is an industry-leading developer and manufacturer of storage solutions that help to create, manage, experience and preserve digital content.

Western Digital is responding to changing market needs by providing a full portfolio of compelling, high-quality storage products with effective technology deployment, high efficiency, flexibility and speed. Its products are marketed under the HGST and WD brands to original equipment manufacturers, distributors, resellers, cloud infrastructure providers and consumers.

The most compelling news for 2017 and beyond is that the company made a stunning $19 billion purchase of SanDisk last year. This could be a strong addition to Western Digital’s current offerings, and the company could significantly benefit from SanDisk’s technology and portfolio leadership in the NAND flash semiconductor and enterprise flash systems market.

Baird sees the secular growth in storage as a big positive, and Western Digital predicts a fourfold increase between 2016 and 2020. Three big areas should also pay off handsomely:

1) Data Center capacity is expected to increase at a 40% compounded-annual-growth rate between 2015 and 2020.
2) The company’s Data Center Solutions is expected to drive all-incremental revenue growth in the coming years.
3) Capacity HDD’s are expected to continue growing and shoe be four to five times more cost effective due to NAND by 2020.

Shareholders receive a 2.8% dividend. The Baird price target is $80. The consensus price objective is $79.02. Shares closed Wednesday at $71.45.

Despite the Baird prowess in small and mid-cap coverage, many of their top picks in technology remain the mega-cap leaders, and with good reason. Despite the bullishness in the market, prices are ahead of themselves. The big sector leaders will hold up better in a sell-off and rebound faster when things improve.