Technology

Why Old-School Legacy Tech Stocks May Be Big 2020 Winners

Lee Jackson

Published: December 13, 2019 6:25 am

Last Updated: January 30, 2020 12:13 pm

Some of the biggest moves in technology this year have been from the new giants in the industry. Apple Inc. (NASDAQ: AAPL) has almost doubled, and there were big moves in the software as a service (SaaS) and cloud computing stocks. So the real question for investors is where the good values are after such a red-hot year.

The answer may lie with the old-school, “legacy” technology stocks, as some of them, while solid this year, certainly haven’t doubled in price. We screened the Merrill Lynch technology research universe for legacy technology leaders that have solid upside potential for 2020. We found five that look like great additions to aggressive growth portfolios, and are all rated Buy at Merrill Lynch.

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Adobe Systems

Shares of this high-profile old-school software company have backed up in price and are offering the best entry point in quite some time. Adobe Systems Inc. (NASDAQ: ADBE) operates in three segments: Digital Media, Digital Marketing and Print and Publishing. The Digital Media segment provides tools and solutions that enable individuals, small and medium businesses, and enterprises to create, publish, promote and monetize their digital content.

Top Wall Street analysts see the company benefiting from artificial intelligence, predictive analytics, automation bots, speech recognition and natural language processing and image recognition. Some analysts anticipate that earnings may increase a solid 30% or more in the coming year.

The company recently hosted its MAX analyst day. The fiscal year 2020 revenue guide implies about 18% growth, in-line with Wall Street estimates. In addition, while Adobe typically reiterates the fiscal fourth-quarter guidance, it surprised to the upside and raised Digital Media net new annual recurring revenue by $25 million to $475 million.

The Merrill Lynch price target for the shares is $323, and the Wall Street consensus target is $316.76. The shares closed Thursday’s trading at $305.96 apiece, but they popped to $315.60 in Friday’s premarket after an earnings report with strong revenue growth.

Cisco

Cybersecurity is a growing silo for this long-time networking mega-cap tech leader. 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 cybersecurity products give clients the scope, scale and capabilities to keep up with the complexity and volume of threats. Putting security above everything helps corporations innovate while keeping their assets safe.

Cisco shareholders receive a 3.10% dividend. Merrill Lynch has a target price of $56, while the posted consensus target was last seen at $55.58. The stock closed at $45.67 a share on Thursday.

This old-school leader in semiconductors continues to work hard to focus more on Internet of Things and data center cloud spending, and it is one of the top picks at Merrill Lynch for 2020. 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.

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Intel offers investors a solid 2.25% dividend, while the shares trade at 13.4 times trailing 12-month earnings. The $70 Merrill Lynch price target is well above the $54.45 consensus price objective. The shares closed most recently at $57.55.

Microsoft

This top old-school technology stock saw posted all-time highs this year, and the company has a massive $133.8 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 so far this year and all of last.

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 the company’s 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 second-quarter earnings report, which was outstanding.

Shareholders receive a 1.5% dividend. Merrill Lynch has set its price target at $162. The consensus price objective is $156.77, and the shares closed most recently at $153.24.

Texas Instruments

This old-school chip tech company offers solid value at current levels and is a great pick for more conservative investors. Texas Instruments Inc. (NASDAQ: TXN) is a broad-based supplier of semiconductor components, ranging from digital signal processors to high-performance analog components, to digital light-processing technology and calculators.

Some 65% of the company’s sales are exposed to the well-diversified, business-to-business industrial, automotive, communications infrastructure and enterprise markets. While the stock was hit hard recently as it is a big Apple supplier, the long-term outlook for this venerable leader makes it a safer bet for accounts with less risk tolerance.

The stock was crushed after posting solid third-quarter results, but guidance surprised Wall Street. The backup in the share price still offers long-term investors the best entry point since the summer.

Investors in Texas Instruments receive a 2.85% dividend. The Merrill Lynch price target is $140. The $126.07 consensus target is below the most recent close of $126.07 a share.

While some of these companies have had a stellar year, they haven’t seen some of the huge runs that other technology stocks have had. Trading at reasonable valuations, and with most paying dependable dividends, they are solid picks after a huge run in all the major market indexes.