Social Media to Security: Prospecting in Tech

07/30/2014 10:00 am EST


Rob DeFrancesco

Founder, Tech-Stock Prospector

Rob DeFrancesco, editor of Tech-Stock Prospector, looks at second quarter tech earnings and highlights some favorite investment ideas in music streaming, social media, internet security, and smartphones.

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

Rob DeFrancesco:  Hey Steve, doing well.  Thanks for having me again.

Steven Halpern:  We're now in the midst of second quarter earnings.  First, how is the tech sector doing so far, in general, and perhaps you could touch on some of the highlights and lowlights of earnings performance.

Rob DeFrancesco:  Well, I would say we're still fairly early in Q2 earnings season, but a lot of the big names have reported and I would say the results have been generally better than expected.  Companies are beating expectations.  They are raising guidance.  The conference calls are positive, so, I think, in general, it looks good. 

Of course, there are pockets of disappointment.  For example, today, Pandora (P), the internet radio company, the shares are down 14%, but even there, the fundamentals are not bad.  They raised 2014 revenue guidance. 

There is some concern about one metric, basically, ad-monetization per hour.  Here, the main thing is, mobile ad revenue is now 76% of total add revenue and they are getting a boost in local add revenue-up 144% in the latest quarter-so I think they'll have better execution in the second half.

Steven Halpern:  One subsector that you have been particularly bullish on is IT security companies.  What's the outlook here and are there any names in the sector you would point to?

Rob DeFrancesco:  Yeah.  A lot of these have already reported. The first, Check Point Software, which is kind of a bellwether, because they're a big name-they're big, they don't grow a lot-but they actually came and did better than expected results. 

I think, generally, what these companies are benefiting from is a firewall refresh cycle.  I think network upgrades are-and just a lot of enterprises are-looking to replace older solutions. 

One example is Fortinet (FTNT), which had billings growth in Q2 of 33%, which is the strongest in 13 quarters.  Their US enterprise business was up 73% and they are getting a lot of traction with large deals, number over 500,000, was up 95%, so that's a good name in security doing well. 

F-5 Networks (FFIV) which are application delivery controllers, but their security is now their main growth driver in their business and they've been expanding their security portfolio.  The CEO said the pipeline of new business, in general at F-5, is significantly higher than the last year, so that bodes well for the next few quarters. 

Then a smaller name, Proofpoint (PFPT), is cloud-based e-mail security and archiving.  They had Q2 billings worth 43% and their revenue midpoint for 2014 is showing growth of 38%. 

A key driver there is their TAP solution, which is growing over 100% a year.  That handles advanced persistent threats, and that's where they compete with a company called FireEye also in security center.

Steven Halpern:  I know you've been recommending a company called Qlik Technologies (QLIK) that a lot of listeners may not be familiar with.  I also noticed the stock was up some 12% in price today, as we're speaking.  What's going on with this company?


Rob DeFrancesco:  Yes, QLIK-they are an enterprise software business intelligence analytics, basically data visualization, so it's the same thing that Tableau Software (DATA) does.  It's the next generation of business intelligence where it's making it easier for people to visualize data on the desktop.  They are just about to start a major product transition. 

They have a new product coming out called Qlik Dot Next .  There was some concern about that there'd be some customer buying delays ahead of the launch, but Q2 they beat expectations and Q3 guidance, actually, the midpoint was above the consensus. 

They just started to release this new product and will release more of it in September.  I think they are executing very well, so that's why the stock is up so much today.

Steven Halpern:  The last time we spoke you had just taken advantage of weakness in the price of Facebook (FB) in order to add the stock to your buy list.  It's done significantly well since then.  Could you update us on your opinion?

Rob DeFrancesco:  Yes.  We added Facebook on the pullback just below $60 in March and so, yeah, it's done well since then.  Q2 was really a good quarter.  They beat top and bottom line advertising revenue up 67% and the key thing there, of course, is mobile; 62% mobile ad revenue contribution, they now have 654 million daily active users in Mobile, up 39%. 

The big thing here is engagement continues to rise, even as the user base grows, which is a good sign.  I think they can do EPS over $2 a share next year, which puts the fair value target for me probably mid to upper $80s.  I like to buy these stocks on pullbacks, so I wouldn't chase this, but if we get a pullback, you could add the Facebook there.

Steven Halpern:  Finally, it's hard to talk about the tech sector without at least touching on Apple (AAPL).  What's your outlook there?

Rob DeFrancesco:  Yeah, Apple, they are about to go into their major product upgrade with iPhone 6, but, I will say, in this quarter, I was impressed with iPhone sales.  They did over 35 million, slightly below consensus, but still, we're a quarter right ahead of a major transition for the iPhone.  That's really important. 

Gross margin numbers were encouraging and the Mac sales, 4.4 million, which is half a million above expectations.  I think we're starting to see the halo effect there of people who own iPhones that want to upgrade from old laptops and they are buying Macs, which, they lowered the prices, so that helps out there. 

The iPad is a little bit of a concern. The second quarter of disappointing results, but they have a big user base that I think over the next few years will continue to buy.  I think the problem with tablets is that the replacement cycle is longer than expected, so that's a little bit of an issue there.  But the key thing with Apple is you are getting rising earnings estimates and you are getting PE expansion. 

We added in Apple of May of 2013 just at the split around $61-$62 area and I think we could probably get it into the $105-$110 area in terms of fair value on the stock.  Once again there, I like Apple.  It would be better on a pullback into the low $90s. 

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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