The second-quarter earnings season is in full force this week, and with some of the mega-cap market leaders coming with results, investors will be looking for guidance for the balance of the year. The stock market peaked six months ago, in January, and stocks have traded sideways since, with much of the sector gains being provided by the FANG stocks.
With technology likely to continue to lead, investors looking to stay in the space or add to positions are in a difficult situation. The tech mega-caps that have led the charge are extended, and any trip up could cause them to plummet.
We screened the Merrill Lynch research universe for technology companies rated Buy that still look to have solid upside to the firm’s price targets and are not trading in the multiple stratosphere. We found four that look like solid plays going forward.
Advanced Micro Devices
After years of frustrating performance, Advanced Micro Devices Inc. (NYSE: AMD) appears to have turned the corner and is a hot commodity on Wall Street. AMD is one of the largest suppliers of PC microprocessors and graphics processors worldwide to computing original equipment manufacturers. The company’s main product lines include desktop, notebook and graphics processors, and embedded/semi-custom chips.
Last year the company released its first major offering in five years, the Ryzen chipset, which many feel is uniquely positioned to compete with the big players like Intel and Nvidia in the $50 billion total addressable market for personal computers, gaming, artificial intelligence and servers.
A recent Merrill Lynch report noted this:
We highlight the company’s drastic product mix shift in first quarter which we believe could be the start of a sustained mix shift to more premium products. Per Mercury research, a record 44% of AMD’s desktop dGPU shipments in first quarter were in graphics cards with a $300 or higher ASP. We suspect this largely captures a steep pick up in Vega GPU shipments since most of the company’s Polaris/earlier products are built into graphics cards that carry an ASP of less than $300. In the fourth quarter of 2017, shipments of $300+ graphics cards accounted for just 15% of overall AMD desktop units which implies sharp (200%+) quarter over quarter growth.
The Merrill Lynch price target for the stock is $20, and the Wall Street consensus price objective was last seen at $15.73. The shares closed trading on Monday at $16.66. AMD is expected to report earnings on Wednesday.
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IBM
This blue chip leader still may be offering investors the best entry point in years. International Business Machines Corp. (NYSE: IBM) is a leading provider of enterprise solutions, offering a broad portfolio of information technology (IT) hardware, business and IT services, and a full suite of software solutions. The company integrates its hardware products with its software and services offerings in order to provide high-value solutions.
IBM’s five major segments are: 1) Cognitive Solutions, 2) Global Business Services, 3) Technology Services & Cloud Platforms, 4) Systems and 5) Global Financing. Analysts cite the company’s potential in the public cloud as a reason for their positive outlook going forward.
For the second quarter, IBM beat analyst expectations on both revenue and earnings per share, despite some currency headwinds. At current trading levels the stock is a bargain, especially if the company can continue to grow its cloud business.
IBM shareholders are paid a large 4.31% dividend. Merrill Lynch has a price target of $200, while the posted consensus target is $170.75. The stock closed Monday at $145.70 a share.
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Intel
This semiconductor leader is working hard to focus more on Internet of Things and data center cloud spending and away from PCs. 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 announced the surprise resignation of the company’s CEO last month while also pre-announcing second-quarter results, which came in above analysts’ expectations. Despite the good results, the startling resignation hit the stock, and the analysts feel that investors should take advantage of the selling. Actual results are expected to be released Thursday.
Intel investors are paid a solid 2.31% dividend. The $62 Merrill Lynch price target is well above the consensus price objective of $58.87. The shares closed trading on Monday at $52.31, and they are down almost 15% over the past month.
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Western Digital
This is a leader in the total addressable hard disk drive (HDD) market. Western Digital Corp. (NASDAQ: WDC) designs, manufactures and markets hard disk drives for use in enterprise storage, servers, desktop and laptop computers and consumer electronic devices. It also has a growing solid state drive and storage systems portfolio and is currently the third largest enterprise solid state drive manufacturer.
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.
The analysts feel the company’s business mix switch to NAND flash could provide earnings momentum and growth as compared to the rather flat revenue streams from the HDD product line. In addition, personal computers account for 50% of hard disk drive sales, and the improved performance at Dell and overall PC sales bodes well for the company in 2018 and beyond.
Shareholders of Western Digital are paid a 2.62% dividend. The Merrill Lynch analysts have a huge $120 price target. The consensus price target is $115.73, and the stock closed most recently at $76.38 per share.
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These four top tech stocks have big upside to the Merrill Lynch price targets and also offer investors perhaps a more comfortable entry point. There is a good chance the market could continue to trade sideways for the balance of 2018, and these could be good vehicles for that move.
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