Despite an outstanding 2017 for the technology sector, which was up a massive 36.9% for the year, many that believe the incredible technology revolution that started with the advent of the smartphone in 2007 is still in its infancy, and with good reason.
The tech sector is being driven by innovation in every field, from artificial intelligence to autonomous driving to bitcoin mining and a host of other new and exciting areas.
In a new research report, the technology team at RBC sees three big silos driving the tech sector forward:
- Research and development spending for semiconductors
- Ethernet switching
- Data center growth
They also believe that tax reform and the argument this year about value versus growth are important factors in stock selection.
The report highlights five companies as favorites for 2018, including one that is the analysts’ top pick. All five are rated Outperform.
Arista Networks
The analysts see this as an outstanding growth play for 2018. Arista Networks Inc. (NYSE: ANET) develops high-performance cloud networking solutions, including switches, an advanced software defined networking (SDN) operating system and SDN applications. The company’s low latency switches lower networking costs for high-frequency trading platforms, large internet companies and cloud service providers.
The company posted strong growth momentum and excellent execution in a challenging market in 2017. Arista worked through softening cloud trends seen at competitors, with 51% year-over-year revenue growth and 141% year-over-year international growth in third quarter.
The RBC team sees the company as one of the benefactors in the Ethernet switching market and also cites the solid third-quarter growth as a positive for the fourth quarter and 2018.
The RBC price target for the shares is just $234, while the consensus estimate on Wall Street is $227.17. The shares closed above both levels on Thursday a $232.69.
Arris International
This stock has been an RBC favorite for some time and the firm sees it as a top value play in 2018. Arris International PLC (NASDAQ: ARRS) provides media entertainment and data communications solutions in the United States and internationally. It operates through two segments.
The Customer Premises Equipment segment offers various product solutions, including set-top boxes, gateways, digital subscriber lines and cable modems, and embedded multimedia terminal adapters and voice/data modems that enable service providers to offer voice, video and high-speed data services to residential and business subscribers.
The Network & Cloud segment provides cable modem termination system, converged cable access platform, multichannel video programming distributors, programmer equipment, ad insertion technologies and equipment in the ground or on transmission poles, as well as equipment used to initiate the distribution of content-carrying signals.
RBC has a $33 price objective for the shares. The consensus target price is $34.56, and shares closed most recently at $25.97.
24/7 Wall St.Cisco
This top mega-cap technology stock pick on Wall Street makes good sense for investors seeking tech exposure in 2018. 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.
RBC loves the company’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. And Cisco is another company that could benefit from the tax on overseas money being lowered as it has a whopping $70 billion in cash, 90% of which is overseas.
Shareholders receive a 2.98% dividend. The $40 RBC target price compares with the posted consensus target of $39.06. The stock closed trading most recently at $38.99.
NVIDIA
This top chip stock reported strong earnings all last year, and it was the top performing stock in the S&P 500 in 2016. NVIDIA Corp. (NASDAQ: NVDA) is one of the leaders when it comes to supplying graphics processing technology for the 3D graphics market, including desktop graphics processors and gaming consoles.
NVIDIA is also moving into visual computing chips for cars, mobile devices and supercomputers. The company has been able to use its ability to leverage past investments, with a more controlled spending structure ahead on unified, which enables strong cash flow that is allowing a focus on capital return, which is currently estimated to be $1 billion next year.
RBC analysts feel the stock is maturing to a platform company from a pure chip company, and they see it continuing to benefit from numerous secular trends, including virtual reality, PC gaming, chips in the automobile industry and graphic processing units in the cloud, and consistent data center growth.
The company posted gigantic fiscal third-quarter results that well exceeded Wall Street estimates, with much of the gains directly from the firm’s huge data center and AI business. Growth across all its platforms contributed to NVIDIA’s record revenue for the quarter.
Investors receive a 0.28% dividend. The RBC price target is $250. The consensus price target is just $211.63, below the most recent close at $213.59 a share.
Synopsys
This semiconductor design stock is another Wall Street favorite and the top pick for 2018 at RBC. Synopsys Inc. (NASDAQ: SNPS) is the largest provider of electronic design automation (EDA) software used to design, verify and layout semiconductor chips and electrical systems.
Synopsys represents roughly 28% of the $5 billion EDA market and is the market leader in digital synthesis (Galaxy product) as well as the largest EDA provider of intellectual property for common interconnects like USB. Synopsys continues making inroads into the analog space with the launch of its Galaxy Designer product.
The company recently announced that it has collaborated to integrate Helic’s VeloceRF RF device synthesis, RaptorX EM modeling and Exalto EM parasitic extraction and sign-off tools with Synopsys’ Custom Design Platform. The result of the collaboration is a complete solution for electromagnetic-aware layout and analysis of mixed-signal, analog and radio frequency designs.
RBC team sees Synopsys as a winner as research and development spending continues to surge in 2018. With the company a big player in the EDA market, this looks to be a strong tailwind.
RBC has set its price target at whopping $120. The consensus target is $99.13 The shares closed at $87.89.
Some of these five top picks from RBC for 2018 are offering outstanding value in what is clearly an expensive market. Strong earnings will be required going forward, but should these top companies deliver, higher share prices look to be in order.
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