Social Media, iPhones, and Online Security

02/16/2015 10:00 am EST

Focus: STOCKS

Rob DeFrancesco

Founder, Tech-Stock Prospector

Rob DeFrancesco, editor of Tech-Stock Prospector, discusses some current favorite ideas in the technology sector, including leading players in smartphones, social media, and online security.

Steven Halpern:  Our guest today is Rob DeFrancesco, editor of the Tech-Stock Prospector.  How are you doing today, Rob?

Rob DeFrancesco:  I’m doing great, Steven, thank you.  Thanks for having me on again.  

Steven Halpern:  Well, thank you so much for joining us.  You’ve been a longtime fan of Apple (AAPL) and the company has just reported another strong quarter and, also, recently moved above the $700 billion market cap level.  I was wondering if you could update us on your outlook for the company.  

Rob DeFrancesco:  Sure. December was a standout quarter for Apple mainly because the iPhone sales came in way above even the highest estimates.  

I think the main concern with Apple had been what’s going to happen in the March quarter, but I think the demand is there, especially because China revenue was up 70% in the December quarter and China is now 21% of revenue for Apple, almost at Europe’s contribution, which is 23%.  I think that’s a big growth driver.  

Also, you get the ASP rise (average selling price) in the iPhone price thanks to the higher storage capacity of the iPhone Six.  People are buying the higher capacity version in the Six Plus.  

I think that’s going to help earnings this year and then you have the Apple watch, which is kind of a growth wild card that may not be into a lot of analysts’ estimates.  I think, looking at longer-term, you’re getting a better view into maybe Apple earning $10 a share.  

If you put a 13 or 14 multiple on that, you can get a $130, $140 target.  I think that you’re not going to get huge gains from here on Apple, but I think that they definitely have a lot of growth potential still left with a huge and solid iPhone base and then the Apple watch, the potential is there, too.  

Steven Halpern:  Now another company seems to get a lot of the investor and media attention is Facebook (FB) and you note that the company appears to be ramping up its growth investments. Could you explain?

Rob DeFrancesco:  Yes.  Facebook—in the new, latest issue of the Tech-Stock Prospector—I write that if you’re a Facebook holder for this year, you’re putting up with a big investment cycle.  

It’s going to limit earnings growth.  I think the EPS estimates consensus is showing about 10% growth, but I’d argue that now is the time for Facebook to do that, and they still have top line growth of 37%.  If you invest now, you can leverage that growth in the years ahead.  

Video is going to be a huge thing for them; video advertising.  They have the whole ad tech growth angle that they can exploit.  They have WhatsApp and Instagram that they’re going to monetize.  

I think that the stock is capable of the near term—the next 12 months—getting up maybe into the upper $80s; so, it’s not a huge return from here, but I think if you’re a long-term holder, there’s a lot of potential.  

As an example, Akamai Technologies (AKAM) had a strong quarter for their media and that just shows that there’s a lot of traffic being driven by video, social media, gaming, and things like that.  

Facebook is in the right place at the right time. They’re getting much bigger in mobile. I think the long-term story, the growth there remains intact.  

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Steven Halpern:  Now you and I have spoken in the past about Internet security, a topic that only seems to be getting worse.  What’s your outlook on this sector and what companies should investors keep an eye on?

Rob DeFrancesco:  Yes. It’s almost like daily or weekly we’re getting these huge breeches that we’re hearing about. FireEye (FEYE) is one of the big beneficiaries because their Mandiant unit—which they bought—is like the go-to source for forensics.  

They clean up.  If there are big breeches, they come in, they see what happened, they clean it up, and then they can go on and sell their services to those customers.  FireEye is benefitting there.  

There’s another company called CyberArk (CYBR), which recently went public. One of the new trends in security is that organizations are realizing their perimeter is going to get breeched. What happens when people get inside?  

If you have really important assets inside the network, inside the perimeter—like financial stuff or your core infrastructure, IT infrastructure—that needs to be separated and secured itself. CyperArk is securing key assets inside the network and I think that’s a unique position that they’re in.  

Then you have a couple of smaller cloud—anything cloud-based—security is seeing a lot of growth, so Proofpoint (PFPT) and Qualys (QLYS).  You have to be careful there, those stocks have had nice runs. They’re something that I’d look at more on pullbacks.

Steven Halpern:  Now, at the start of the year in our annual Top Stock Picks report, you chose Tableau Software (DATA) as your favorite idea for 2015 and in just six weeks since that report was issued, the stock is up nearly 15%.  Could you update us on your opinion?

Rob DeFrancesco:  Sure.  Tableau, the thing is here that—the old business intelligence software—it’s moving to this new data visualization offering and Tableau is the leader.  

Organizations realize that they can get a lot of unique information out of analyzing their data and visualizing it and Tableau makes it easy to do that as opposed to legacy solutions, which were just clunky and hard to learn and they’re not being used.  

Tableau is showing incredible growth. I mean, the revenue last year came in at 78% and they’re just ramping up new customer additions and they’re getting a lot more, larger deals, which is showing that they’re expanding across their customer base.  

The guidance for this year was conservative. They said they only expect 2015 revenue growth of around 40%, which, after coming off a year of 78%, that seems a little ridiculous.  Also, going into 2014, they said they were looking for 40% growth. They’re pretty conservative there.  

That being said, the stock has rallied sharply, like you said.  Once again, if that were to pull back, but I think the broad trend there with state of visualization, they’re one of the leaders.  

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

Rob DeFrancesco:  Great, Steven, thank you very much.

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