Five Favorites for Tech Investors

05/23/2014 10:00 am EST

Focus: STOCKS

Rob DeFrancesco

Founder, Tech-Stock Prospector

Tech sector expert Rob DeFrancesco, editor of Tech-Stock Prospector, sees opportunity in the recent tech stock sell-off and highlights five favorite stocks in areas such as networking, mobile, and social media.

Steven Halpern: Joining us today is Rob DeFrancesco, Editor of Tech-Stock Prospector. How are you doing today, Rob?

Rob DeFrancesco: Hi, Steve, doing great. Nice to speak to you again.

Steven Halpern: Well, thank you for taking the time. First, we’re going to look at the overall technology space and the sector has been very volatile lately with many names seeing sharp rises and subsequent sharp declines. Where in the cycle do you think we now stand?

Rob DeFrancesco: Yeah, we had a big correction here and a lot of the momentum, high-growth stock names that sort of peaked in February and early March, so I think that the market had stabilized a bit for that group, and so, I think that maybe if we have some sideways action there, that could lessen some of the volatility there.

I still think some of those names are good over the long-term—such as the cloud space, as those stocks were hit particularly hard. But longer-term names—like Workday (WDAY) and ServiceNow (NOW), and NetSuite (N)—I think still look good.

So, I think maybe the first of this selling phase is over and I’m just hoping that we get some sideways action and we can get some stabilization in those momentum stocks.

Steven Halpern: Now, among momentum names, you’ve taken advantage of the recent weakness to buy Facebook (FB). Could you share your thoughts on that stock?

Rob DeFrancesco: Yeah, Facebook, I think it was—got above, a little over $72 and now it’s back down to high $50s. They had a really good Q1, topped estimates, and ad revenue was up 82%; still increasing their mobile presence.

Mobile ads were 59% of total ad revenue versus 30% in the year ago, so—and they now have a billion mobile monthly active users—so they still have a lot of growth potential in mobile.

And also there’s some new things coming—video ads and the newsfeed—and they’re going to start monetizing Instagram more, and down the road, they could monetize WhatsApp.

Then another possible thing is, Facebook could be getting into payments, because they have such a huge installed base; so there is potential growth there. And at Facebook, there was a big boost in the 2014 consensus EPS estimates after Q1, so that’s always a good sign, rising estimates.

Steven Halpern: Now, another momentum play that you like is Yelp (YELP), which operates online directories. What’s the outlook there?

Rob DeFrancesco: Yeah, Yelp was hit particularly hard. That was above $101, the stock. Now it’s back down to around $58. That’s a local play.

They had a good quarter, though, the fundamentals, Q1 revenue up 65% and their active local business accounts rose above 60%, and this is also a mobile play, 60% of all their searches now are on mobile and 35% of their new reviews come from mobile.

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And another thing with Yelp is, you have the international growth potential. They’re in about 120 markets now; they added Mexico and Japan in Q1, so they have the ability to keep adding new markets there, and with Yelp, there’s also the potential that it’s an M&A play. I think companies like Google, Apple, Yahoo might even be interested in Yelp as a potential buyout target.

Steven Halpern: Now, you’ve been bullish on a pair companies—one is Akamai (AKAM) and the other is F5 Networks (FFIV)—both of which have been benefiting from rising earnings estimates. Could you tell us a little more about these stocks?

Rob DeFrancesco: Yes, Akamai is a long-time content delivery network provider and they’re looking at 2014 revenue growth of over 22%.

They had a really good Q1, the top and bottom line, and it was basically driven by their media delivery unit, which is, they got a boost from higher Web traffic. That’s all revenue growth and the Web traffic is being driven by social media and videos.

They also saw a lot of software downloads and also online video game downloads. But also with Akamai, they have a security component. They just closed a pretty big acquisition of a company called Prolexic that does denial of service protection. Akamai now has over 1200 security customers, so that’s a new growth part.

With F5, they’re application delivery controllers. They speed up applications on the network and they have about a 37% share of the install base of ADCs (application delivery controllers).

The thing about them is, Cisco got out of this business, so they’ve been taking some of that market share from that legacy Cisco and installed base, so, and their product revenue showed some really strong growth with this quarter—and with F5, you also have a security component.

They are getting more into security, particularly on the data center side, so that adds a nice potential revenue boost as they’re able to build that business out.

Steven Halpern: Now, finally, let’s look at a stock that you recently highlighted as a beaten-up IPO. What’s the story behind Rubicon Project (RUBI)?

Rob DeFrancesco: Yes, it’s a small company, so this is risky. It’s market cap is below $500 million. They’re ad tech, so they basically automate buying and selling of digital ads.

They concentrate on the seller side, so they’re selling, sort of, publishers and apps. The thing is here, a lot of that digital advertising is getting more automated. They’re in a nice growth area there, and they’re also moving into mobile and video ad sales.

They had an IPO last month at $15 a share. The stock ran up to $23, and then in the pullback, it sunk to, down to around $11 earlier in May, so we’re back around $12 now and 2014 revenue growth is somewhere near 35%, so it’s kind of a beaten-up company, but it’s small, and it’s definitely a name to watch for rebound potential.

Steven Halpern: Well, we really appreciate you taking the time today. Thanks for joining us.

Rob DeFrancesco: Great, thanks, Steve. I appreciate it.

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