Technology
Merrill Lynch Says Buy Technology for 2018: 5 Top Picks
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Any way you look at it, the market is expensive. When you add in the fact that we have gone 375 trading days without a 5% correction, which is the second longest stretch since 1928, we are certainly in uncharted waters. Then, just to spice things up, also add in the fact that a 5% correction happens on average three times per year. With the possibility that 2018 could be the final year of the bull market, the question is what to buy now?
In a new and lengthy year-end report from Savita Subramanian and her outstanding team at Merrill Lynch, while acknowledging the nosebleed levels of the market, with the S&P 500 forward price to earnings of a rich 18 times, they also say that missing out on the final run of a bull market can be a losing hand. The analysts also maintain that in the late stages of a bull market momentum are the place to be, and for 2018 momentum equals technology stocks.
With that in mind, we screened the Merrill Lynch technology research universe for stocks that are rated Buy and look to have solid upside potential for 2018. We found five that may make outstanding plays.
Intel
This leader in semiconductors is working hard to scale away from dependence on personal computers, and the Internet of Things and data center cloud spending are a big part of the shift. Intel Corp. (NASDAQ: INTC) designs, manufactures and sells integrated digital technology platforms worldwide.
The company’s platforms are used in various computing applications comprising notebooks, two-in-one systems, desktops, servers, tablets, smartphones, wireless and wired connectivity products, wearables, retail devices and manufacturing devices, as well as for retail, transportation, industrial, buildings, home use and other market segments.
Intel’s data-centric businesses now account for about 45% of revenues, versus 40% three years ago, with its Data Center Group poised to grow by high-single-digit percentage points over the next few years. In addition, many feel that Intel’s cloud hyperscale customers will continue to spend aggressively on cloud computing infrastructure over the next few years. This growing silo of business combined with the company’s legacy products makes it a solid and reasonable stock to own for 2018.
Intel investors receive a 2.33% dividend. The Merrill Lynch price target for the shares is $49 and should be lifted higher soon. The Wall Street consensus price objective is $46.84. The shares traded early Friday at $46.40 apiece.
Micron Technology
Micron Technology Inc. (NASDAQ: MU) is a global leader in advanced semiconductor systems, and hedge fund manager David Einhorn from Greenlight Capital has been buying the shares recently. Micron’s 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 company posted outstanding quarterly earnings recently and also provided forward guidance that exceeded Wall Street estimates. With memory demand drivers remaining somewhat underappreciated and with solid demand from end-markets such as data center, artificial intelligence (AI), deep learning, big data, mobile and autonomous driving, Micron continues to execute well on its manufacturing road map. The analysts expect the company to drive gross and operating margins higher in 2018, even if prices return to more typical deflationary environment.
The new Merrill Lynch price target is $60. The consensus price target is $58.79, and shares traded at $44.60 Friday morning.
24/7 Wall St.Microsoft
This top old-school technology stock has posted all-time highs this year and has a massive $121.79 billion sitting on the balance sheet. Microsoft Inc. (NASDAQ: MSFT) continues to find an increasing amount of support from portfolio managers, who have added the software giant to their holdings at an increasingly faster pace all of this year and last.
Numerous Wall Street analysts feel that Microsoft has become a clear number two in the public or hyper-scale cloud infrastructure market with Azure, which is the company’s cloud computing platform offering. Some have flagged Azure as a solid rival to Amazon’s AWS service. Analysts also maintain that Microsoft is discounting Azure for large enterprises, such that Azure may be cheaper than AWS for larger users. The cloud was big in the recent report.
Microsoft reported a very strong fiscal first quarter, and going forward Merrill Lynch sees the company benefiting from AI through an AI platform, predictive analytics, automation bots, speech recognition and natural language processing and image recognition.
Microsoft shareholders currently receive a 2% dividend. Merrill Lynch has a $98 price target on the shares, while the consensus price objective is $92.75. The shares were trading at $85.15.
VMware
This may still be one of the best stocks to own and is one of Merrill Lynch’s top software picks for 2018. VMware Inc. (NYSE: VMW) provides virtualization infrastructure solutions in the United States and internationally. Its virtualization infrastructure solutions include a suite of products designed to deliver a software-defined data center run on industry-standard desktop computers and servers, and support a range of operating system and application environments, as well as networking and storage infrastructures. Its solutions enable organizations to aggregate multiple servers, storage infrastructure and networks together into shared pools of capacity.
This is one company that may be poised to benefit big-time in 2018 as corporate budgets start to loosen up and spending increases. The passing of the tax reform bill also could kick-start that process. In addition, recent surveys suggest that expectations for budget growth at major corporations requiring VMware’s products are at a nine-year high. VMware is uniquely positioned to benefit from budget growth given its global installed base, especially related to larger enterprise license agreements, as well as the share of wallet virtualization it has within most IT budgets.
The $148 Merrill Lynch price target compares with the $132.32 consensus target. Shares were last seen at $127.40.
Western Digital
This long-time innovator in the storage industry is a leader in the total addressable HDD market. 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.
The company 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.
Western Digital stock traded down after earnings despite being above Wall Street earnings expectations for the fourth quarter and fiscal 2018, as investors were concerned about peak margins. Analysts feel that NAND supply-demand will not come into balance until mid-calendar 2018, creating forward upside potential.
In addition, the long, drawn dispute with Toshiba finally was put to rest and Merrill Lynch said this:
The global settlement is positive as it removes uncertainty of NAND supply for Western Digital and the company gets to protect its intellectual property. The company positively preannounced the December quarter (revenue high end, margins came in better, offset somewhat by higher operating expense). Visibility has improved and management expects the flash supply/demand environment to remain healthy throughout 2018.
Shareholders receive a 2.47% dividend. Merrill Lynch has set its price target at $120. The consensus target is $115.77, and the stock was trading at $81.10.
These five top stocks are reasonable compared to some of the other high-flying technology stocks, and would make good additions to aggressive growth accounts looking to add exposure to the sector for 2018.
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