Technology

Why Mega-Cap Tech Stocks Are the Safe Play for the Rest of 2018

Lee Jackson

Published: July 5, 2018 7:55 am

Last Updated: January 11, 2020 9:28 pm

The Wall Street love affair with technology continues as we begin the third quarter, and with good reason. The technology-laden Nasdaq Composite Index has made numerous all-time highs this year, and corporate spending for information technology is expected to remain very robust. With certain areas like semiconductors somewhat frothy, it makes sense to stay with the mega-cap giants with cloud exposure.

Given how many firms on Wall Street remain bullish on technology for the rest of the year, now may be the time to look at companies that aren’t horribly overvalued, are mega-cap leaders and have given reasonable forward guidance.

We screened the Merrill Lynch technology research universe and found four top stocks rated Buy that look like solid picks for the rest of 2018 and beyond. We also looked to avoid semiconductor stocks.

Amazon

This absolute leader in online retail and dominant player in cloud storage business remains the top pick on Wall Street. Amazon.com Inc. (NASDAQ: AMZN) serves consumers through retail websites that primarily include merchandise and content purchased for resale from vendors and those offered by third-party sellers.

The company serves developers and enterprises through Amazon Web Services, which provides computing, storage, database, analytics, applications and deployment services that enable virtually various businesses. AWS is also the undisputed leader in the cloud now, and many top analysts see the company expanding and moving up the enterprise information value chain and targeting a larger total addressable market.

Amazon’s AWS is expected to be the big winner in the U.S. Department of Defense’s new $10 billion JEDI cloud project. Based on conversations with customers and partners serving various U.S. government agencies, many on Wall Street feel that AWS is best-positioned to win the lion’s share of the contract, given its leadership position in the federal government vertical and the apparent success of its big CIA cloud contract.

The Merrill Lynch price target for the shares is $1,840, and the Wall Street consensus target was last seen at $1,848.12. The shares closed trading on Tuesday at $1,693.96 apiece.

Apple

This technology giant has been hit on concerns that the iPhone X is not the huge home run that was expected. Apple Inc. (NASDAQ: AAPL) designs, manufactures and markets consumer electronics and computers, and it has developed its own proprietary iOS and Mac OS X operating systems and related software platform/ecosystem.

Revenues are principally derived from the iPhone line of smartphones, hardware sales of the Macintosh family of notebook and desktop computers, iPad tablets and iPod portable digital music players. The company also realizes revenue from software, peripherals, digital media and services.

One of the most famous portfolio managers who is bullish on the company is the legendary Warren Buffett, who owns a reported and stunning 240 million shares, 75 million of which he bought in the first quarter of 2018. With shares trading at a low 14.33 times estimated 2019 earnings, it’s easy to see why the Oracle of Omaha has a massive position.

Apple shareholders are paid a 1.59% dividend. Merrill Lynch has a price target of $225, which is above the consensus target across of $200.06. The stock closed trading at $183.92 on Tuesday.

Cisco

This top mega-cap technology company recently reported an outstanding quarter. 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 reported a 4.4% rise in quarterly revenue, its second straight quarterly increase, driven by strong growth in its newer businesses such as security. Total revenue of $12.46 billion was more than what was expected by analysts, according to Thomson Reuters. The company’s net income also rose from a year earlier. Toss in a massive $25 billion share buyback plan, and investors should be well rewarded going forward.

Cisco investors are paid a solid 3.12% dividend. The $53 Merrill Lynch target price compares with the consensus figure of $49.70 a share. The stock closed most recently at $42.34 per share.

Microsoft

This top old-school technology stock has posted all-time highs this year and has a massive $138.6 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. The cloud was big in the recent earnings report, which was outstanding.

Many 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 its cloud computing platform offering. Some have flagged Azure as a solid rival to Amazon’s AWS service, while others 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 earnings report which was outstanding.

Microsoft also is expected to be a winner in the government JEDI cloud project, as the company and its dedicated Azure Government segment appear to be the main challenger to AWS, with industry checks barely mentioning IBM and Google, and countering that Oracle has little traction as a provider of modern cloud infrastructure services to the U.S. federal government.

Microsoft shareholders currently receive a 1.7% dividend. Merrill Lynch has set its price target at $123. The posted consensus price objective is $112.56, and the shares closed most recently at $99.05.

These four top companies are not dependent on sales of semiconductors for revenue. Remember, for most of these companies, earnings for the second quarter are right around the corner, so it may make sense to buy partial positions and see how the results come in.