Top 3 Tech Stocks for 2013
NEW YORK (TheStreet) -- Weighed down by uncertainty in Europe, fears about the fiscal cliff and weakness in the PC market, this has hardly been a stellar earnings season in Silicon Valley, although Amazon(:AMZN), Qualcomm(:QCOM) and EMC(:EMC) could offer bruised investors something to cheer about in 2013.
"It's not very bright for tech overall, because there's a strong anticipation of a continued downturn in Europe and a prolonged fear of a fiscal cliff," said Jeff Sica, founder and chief investment officer of Sica Wealth Management.
From online retail to smartphone components and storage, though, there are opportunities for investors. Set against this backdrop, Amazon, Qualcomm and EMC all well positioned for the coming year.
"Amazon is so far ahead of its online retail competitors," said Sica, who has also been won over by Qualcomm's status as a trailblazer in the LTE space.
In storage, EMC looks set to continue its market dominance, according to Daniel Ives, an analyst at FBR Capital Markets. "EMC, I think, is one of the better secular themes in tech, if you look at big data, next-gen storage, as well as their ownership of VMware(:VMW) on the virtualization side," he told TheStreet.
Apple(:AAPL), of course, still has plenty of fans, despite the recent sell-off in the iPhone maker's stock.
"I don't see how you can go wrong with Apple," said Brian White, an analyst at Topeka Capital Markets, in an interview "It's amazing, this Apple correction -- I think it's driven by the market."
"Apple, at the moment, is under a lot of pressure," added Shaw Wu, an analyst at Sterne Agee, who cites the tech giant as a top pick for 2013. "But it doesn't seem to be so fundamental driven -- it seems to be driven by other things, like the fiscal cliff."
There's no doubt that Apple will be in the spotlight next year. Investors, though, should also pay close attention to Amazon, Qualcomm and EMC: Amazon.com
Amazon looks a good bet for investors in 2013 as the online retailer continues its upward trajectory.
"Although they have had a very, very good year, they have some momentum behind them," said Sica, who has a small position in Amazon. "I think that they have such a good platform and I don't really see online commerce declining -- I see it advancing."
Online retail sales are expected to grow 13.5% in 2013, according to recent research from FTI Consulting, surpassing $250 billion. That number is expected to top $460 billion in 2020.
Set against this backdrop, Amazon continues to grow revenue at an impressive rate. The company's third-quarter sales climbed 27% year-over-year to reach $13.81 billion, boosted by a 36% hike in its Electronics and other General Merchandise (EGM) segment. Amazon's media revenue, which includes books, electronic content, DVDs and music, increased 11% compared to the prior year's quarter.
An established holiday season and back-to-school heavyweight, Amazon's also perfectly positioned for a tough economy, as consumers seek out efficient comparison shopping.
Crucially, the company is also harnessing the mobile device explosion, recently launching the latest version of its popular Amazon Mobile app for iOS devices, which can notify consumers when a products ships and is delivered. The app also offers daily notifications on Amazon's Lightning Deals.
The Kindle e-reader and Kindle Fire tablet, however, primarily bring consumers closer to Amazon's content and offerings such as its Amazon Prime shipping service.
From Wine to Web Services, Amazon has a bewildering (and constantly growing) array of services in its portfolio, as the company seeks to expand its top line. Amazon's even playing in the alternative TV market, where its Instant Video is gaining share from market leader Netflix(:NFLX), according to ChangeWave Research.
Like most big retailers, though, Amazon's profit margins remain thin. The company's third-quarter earnings recently came in below Wall Street's expectations; not that analysts were concerned. Evercore Partners' Ken Sena recently added Amazon to the firm's "Conviction Buy List," citing the potential for Amazon Web Services (AWS) to deliver higher margins.
A set of cloud-based services ranging from enterprise and mobile applications to big data and social games, AWS's growth is outpacing the industry, according to Sena, who predicts a 45% compound annual growth rate from 2012 to 2018.
The analyst also sees retailer traction on Amazon's marketplace and the rollout of new distribution centers, which is nearing completion, as good news for margins.
Sica cites Amazon's trailblazing status as key to its success, as well the ease with which consumers can use its many services. "They have some competitive advantages -- they were first in and they developed their platform to be very convenient," he said. "They are very geared towards the consumer, which is critical."
Amazon shares have gained more than 39% this year, far outpacing the Nasdaq's 13.48% gain.
Chip maker Qualcomm continues to shine brighter than most tech stocks, boosted by explosive smartphone demand and consumers' appetite for superfast networks.
Widely regarded as one of the big beneficiaries of the push to high-speed LTE networks, Qualcomm provides chips to a host of gadget makers, including Apple, Samsung, Nokia(:NOK), LG and HTC.
For example, the San Diego-based company has a power management chip, an LTE modem and an RF Transceiver within the new iPhone 5.
"Qualcomm remains our top large-cap pick as the company's focus on integration and a 4G modem leadership helps it outperform a tough environment," wrote Ian Ing of Lazard Capital Markets in a recent note. The analyst, who has a buy rating and $79 price target for Qualcomm, predicts "full steam ahead" in 2013.
There's clearly plenty of momentum behind the company. Qualcomm blew past Wall Street's estimates for its third-quarter results earlier this month, boosted by exceptionally strong demand for smartphones. The company also delivered healthy guidance.
This contrasts sharply with the cautious tone struck by other component makers recently. Intel(:INTC) cited weak demand in its third-quarter results last month, while Texas Instruments(:TXN) delivered weaker-than-expected guidance and announced layoffs.
Qualcomm, however, shrugged off tech spending headwinds. At its annual analyst event in mid-November, the chip maker projected 20% to 26% revenue growth in fiscal 2013 and non-GAAP operating income growth between 14% and 21%. The company's also looking for a double-digit Compound Annual Growth Rate (CAGR) on revenue and EPS over the next five years.
Unsurprisingly, Wall Street sentiment towards the company has been overwhelmingly positive, with analysts predicting huge opportunities in emerging markets.
"We continue to be buyers with 2013 catalysts including China Mobile, new products, iPhone and a secularly growing smartphone market," wrote Sterne Agee analyst Vijay Rakesh, in a recent note. Some 65% of China Unicom's phones contain Qualcomm processors, added the analyst, noting that China Mobile presents a big opportunity for the firm in the first half of next year.
Qualcomm's Snapdragon processors already support a wide flavor of 3G and 4G LTE technologies, something that's key in countries such as China, where a diverse range of networks are in use. The next version of Qualcomm's Snapdragon processors will be introduced in the first quarter of 2013.
Qualcomm, which overhauled its corporate structure earlier this year in an attempt to speed up product delivery and protect patents, also discussed the opportunities around Small Cell technology during its analyst event.
Similar to Femto Cell, Small Cell refers to a low-power radio technology which can be deployed wherever users need to boost their data capacities. Qualcomm says that the same chips it sells to phone manufacturers can be used within Small Cell devices, potentially opening the door to a lucrative new revenue stream.
TheStreet Ratings has a 'buy' rating on Qualcomm.
EMC may lack the glitz of Apple or the headline-grabbing social media buzz of Facebook(:FB), but the storage giant is certainly worthy of investors' attention.
"I think they are as well-positioned as any company in tech going into 2013," Daniel Ives, an analyst at FBR Capital Markets, told TheStreet. "You feel that they are well-positioned from a product perspective as well as from a secular perspective."
"I view them as the single best-positioned enterprise IT company that serves the cloud," added Brian Marshall, an analyst at ISI Group. "At the end of the day, I think we're only scratching the surface of what's possible with the cloud."
The rise of cloud technology in recent years has spelt good news for EMC, which provides much of the core cloud hardware and software, both for enterprises deploying their own clouds and companies selling cloud services.
EMC, for example, recently revamped its high-end Symmetrix VMAX hardware, which is specifically designed for cloud computing and is gaining traction with customers. The company's high-end storage revenue increased 5% year-over-year in the third quarter.
Other EMC cloud offerings include its Atmos hardware and software, and the offerings of its VCE joint venture with VMware(:VMW) and Cisco(:CSCO).
Aimed at firms looking to quickly build out their cloud infrastructure, the pact centers on pre-packaged blocks of hardware and software, dubbed Vblocks. EMC said that VCE demand was up 30% year-over-year in the company's third quarter.
Like many tech companies, though, EMC has been feeling the strain of a tough economy, dipping below analysts' estimates in its third-quarter results last month (its first notable consensus miss in almost four years). The company's status as a Wall Street darling, however, remains untarnished.
"EMC has executed solidly on its long-term strategy with the result that the company's leadership in storage hardware and software seems virtually unassailable," said Charles King, principal analyst at tech research firm Pund-IT. Most notably, he added, EMC's majority ownership of virtualization software giant VMware continues to reap dividends.
VMware's the jewel in EMC's crown. Despite the global spending slowdown, the software maker still grew its third-quarter revenue 20% compared to the same period last year. VMware accounted for just over 21% of EMC's third-quarter revenue.
EMC also has a slew of new products looming on the horizon, including Project Thunder and Project X, two devices exploiting high-performance Flash storage. The company's also planning to ship the new operating system for its Isilon network-attached storage devices, dubbed Mavericks, before the end of the year, and expects to launch new RSA security products in early 2013.
"This is a $20 billion annual revenue company that I think can continue to grow double digits on the top line for the next several years," added ISI Group's Brian Marshall. "I think that they can grow earnings faster than revenue."
Boosted by cloud, virtualization and the ongoing need to store data, EMC looks set for a strong 2013.
"You can't put storage spending off for that long," said Topeka Capital Markets' White. "I think EMC's a good one."
TheStreet Ratings has a 'buy' rating on EMC.
--Written by James Rogers in New York.
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