I am still on alert for a larger pullback in the market. The larger picture suggests the SPX will li...
5 Favorites for Tech Investors
11/04/2015 10:00 am EST
Rob DeFrancesco is a leading authority on technology stocks; here, the editor of Tech Stock Prospector reviews some of his favorite tech sectors and stocks in markets ranging from smartphones to social media and from email security to data visualization analytics.
Steven Halpern: Joining us today is technology sector expert Rob DeFrancesco, editor of Tech Stock Prospector. How are you doing today, Rob?
Rob DeFrancesco: Hi Steve. I’m doing well. Nice to speak with you again.
Steven Halpern: Now before we talk about some individual stocks, could you give our listeners an overall assessment of the state of the tech market and what investors should expect both near and long-term?
Rob DeFrancesco: Sure. Well, you know we had that sharp pullback in the NASDAQ from a July high to the August low, so we kept it at the end of September and we’ve rallied since then, but we’re still below the high.
I think going forward, part of it depends on what the Fed does in December and how the market reacts. I’m cautiously optimistic. Earnings so far for Q3 are coming in pretty good. They’re not great, so I think it really depends on what the market does here.
If we can move to new highs, that’s rather bullish, although I think that we may be in a holding pattern into the end of the year to see what the Fed does with interest rates.
Steven Halpern: Now one of your longstanding buy recommendations has been Facebook (FB), where you see a shift to new revenue drivers. Could you explain what you mean by that?
Rob DeFrancesco: Yes. Facebook is now trading at all-time highs ahead of earnings and I think that people are getting optimistic on some newer things that they have coming up like Instagram—which is their photo sharing service—now has over 400 million monthly active users.
It’s the number one social media network among younger demographics, so they’re beginning to exploit that by monetizing it and I think it’s really the wildcard for next year in terms of revenue.
I’ve seen estimates of as little as $500 million to up to $1.5 billion for Instagram contributions, so that’s something that’s really adding to the Facebook momentum.
Also, video ads could be a multi-billion dollar revenue opportunity as more TV ad budgets shift online, and then looking at a little longer-term, there is a whole oculus of virtual reality play that Facebook could be getting into, which is going to launch next year but probably won’t really gain traction for a little while, but they have a lot of potential new growth initiatives that will propel it forward.
Steven Halpern: Is it fair to say that you still view this as a long-term situation with plans in place that really could take years to develop?
Rob DeFrancesco: Yes. I mean, with stock at the highs now, you have to be a little cautious here because you could get sharp pullbacks if somebody doesn’t like something in an earnings report.
But that would be an opportunity to add to the positions, or if you are in Facebook, you could pick up then. I never liked chasing stocks on the highs, but this one has a lot of potential and we would look better if there was a little bit of pullback.
Steven Halpern: Now let’s look at Proofpoint (PFPT). Could you explain what this company does and why you find it an attractive situation?
Rob DeFrancesco: Yes. Proofpoint established security play, Cloud-based. Their main product is email protection. These days a lot of security breaches still take place via fake emails, you know, connected to malicious links, so that’s the main part of the business.
Also, advanced threat protection from malware via their TAP subscription service and they have a new mobile product protecting Android and Apple phones, so they just have really good Q3. Revenue was up 37% and they guided for 2016 revenue growth of 29% to 30% which is above the consensus of 27%, so that has taken the stock up sharply since the Q3 report.
I think they’re long-term outlook is positive. They mentioned on the call that they just signed a new partnership with Intel Security which is the old McAfee unit, so that could add to revenue in 2016.
Steven Halpern: Now, another company that you favor—that’s also involved in the Cloud—is called ServiceNow (NOW). What’s the attraction here?
Rob DeFrancesco: ServiceNow, yes. It provides Cloud-based software through the enterprise market large corporate customers and what they do is they automate various services inside the enterprise, so IT. They also do human resources and they’re moving more into IT operations management, and also, like, things like facilities and manufacturing, anything related to services, automating the services processes there.
They have 30% of the global 2000 company best customers, which gives them a big runway to continue to add customers. The story here is this is a play where you’re moving from on-premise legacy solutions that are more expensive and not as up to speed in terms of technology and Service Now is the alternative; and they’re really gaining a lot of traction with large corporations.
Steven Halpern: Now, another company you like is called Qlik Technologies (QLIK) and it’s involved in what is called data visualization analytics. Could you put that in layman’s terms and explain why you like the stock?
Rob DeFrancesco: Sure. Analytics is just analyzing data flow to a company and visualization just provides a visual view, so people can see and explore the data to gain insights from it. More companies these days are turning to analytics in order to get...you know, they have a lot of data and they want to try to mine the data and get information out of it they can find useful.
For example, a retailer may use data visualization analytics to see how weather conditions affect sales of various products across different regions and so that gives them a better idea of where to put inventory and it overall allows companies to make better business decisions and improve operating results.
Qlik was a little weak on revenue in the latest quarter because there was some flipped contracts in the Asia Pacific region. It was just a matter of getting these deals closed. They’re in the pipeline and the longer-term outlook looks good.
Revenue growth is expected to accelerate next year because they have a new product, a new more self-serve product that appeals more to the masses called Sense and that’s working its way into the whole product scheme. They have a Qlik view as their basic product. Now they have two and that should help revenue next year.
Steven Halpern: Now, finally, within the tech sector, many of our listeners follow Apple (AAPL). Would you be kind enough to share your thoughts on the recent quarter?
Rob DeFrancesco: Sure. I think the September quarter was good enough. The stock rallied up to around 119 based on the results. The key thing here is the December quarter—which is a huge quarter—and they have a big iPhone comparable that they have to beat.
They had an early strong iPhone quarter last December with the launch of the iPhone 6. It looks like they’re going to show a bit of growth on the iPhone. That’s what CEO Tim Cook said and there are a couple of things.
Only 31% of the iPhone-installed base has upgraded to the iPhone 6 or higher, so that leaves a lot of room for growth-for getting people to upgrade, and also, they’re seeing more conversions from Android users switching over to the iPhone.
The thing is, Apple gets 62% of its revenue from the iPhone and 24% of total revenue from China, so they’re very reliant on the iPhone. I think people are a little cautious about that, but the key is—as the iPhone is really strong now—they need to be building up these other products like Apple TV and Apple Watch will begin to contribute more so later in 2016.
Steven Halpern: Again, our guest is Rob DeFrancesco of Tech Stock Prospector. Thanks for your insight today.
Rob DeFrancesco: Great, Steven. It’s always a pleasure to talk to you and have a good day.
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