Okay, folks, it's that time of year again: predictions. Here are my Top Techs for 2013 and my Top Tech Specs for 2013. My Top Techs for the year are my all-around winners; call them my highest-conviction names that I own or plan to own in the largest size. My Top Tech Specs are the names I believe could produce the highest return at some undefined point in 2013. I say "some undefined point" because many times a stock puts in one huge run in a short period of time and seldom is that burst sustained through to the end of the next year. For a good example, see Skyworks Solutions
(NASDAQ:SWKS) from my list last year
The first one is easy: Google
(NASDAQ:GOOG). I'm not sure I really need to add a lot of explanation here. I've produced a mountain of analysis on Google and frankly, most of it has been correct. I will also state that I'd put my market share numbers on Google's various business areas up against anyone’s, and I don't think anyone has been better on the Android versus. iOS share. This could become even more important in the 2013-2015 time frame.
Frankly, the market hasn't given Google enough credit for what it has done with both Android and mobile search, as it tends to focus too much on the volatility of the quarterly EPS results and puts very little focus on the dominance that Google sees once it enters a market. As I've stated a few times, the best comparison for Google might well be Berkshire Hathaway
(NYSE:BRK.A); once the market correctly viewed it as the unparalleled investment vehicle it was (and still is), the stock never looked back. For Berkshire Hathaway, that happened in the $8-10k range in the early 1990s.
Google remains my largest investment position and I see nothing to change my $900, $1200, $1800, and even $3000 future target prices for the name.
The caveat here is that I could make Apple
(NASDAQ:AAPL) a bigger short to intermediate term trading position as I do think we should see the next 80-120 points higher occur more quickly in its stock than in Google’s. But as far as my race to $1,000 is concerned, I think Google wins that one easily.
(NASDAQ:FB) makes both my high-conviction list and also my Top Spec list. I certainly believe the stock will retake the $38 IPO level, and that would be a strong performance in the mid 30s percent range, which could get it onto my Top Spec list. However, I don't see the stock stopping in the $33-38 area where many analysts see it. Frankly, I see the stock getting to 50% of total revenues being mobility-based by the end of 2013 (and likely earlier); to me, that means the stock should be closer to $50 than that $38 IPO price. Therefore, a near 100% move should be enough to get FB on both lists.
Research In Motion
This stock—beleaguered, maligned, and, well, I could use just about any "ugly" adjective here—to me looks poised to have a big year. While many (including me) feel that the BlackBerry 10 platform launch will be a make-or-break issue for the stock, I think many are overlooking something very important: how Research In Motion
(NASDAQ:RIMM) reported the last two quarters.
The low for the stock was put in two quarters ago on a better-than-expected report. The most recent report was frankly stunning in how good it was relative to expectations. Yes, the stock got hammered, but that doesn't mean that reaction was correct. The simple fact is that RIM generated $900 million in cash in two quarters, and these were very tough operations quarters. Just think what the company can report if it sells two or three million BlackBerry 10 devices in a quarter, or four to six million devices, or even six to eight million devices. The average selling prices (ASPs) for the new devices will be much higher than current RIM phones.
Lastly, as I've said previously, Research In Motion is not going to lose all its service revenues! My bet right now is that service revenues won’t even drop by 35%. But if they do, and that sells them an additional one to two million BlackBerry 10 units per quarter, than that is probably a good short-term move by the company. And if the platform takes off and becomes a "very strong enterprise security" product again, RIM will be able to increase the service revenues in the future.
Long term, I still feel Research In Motion is challenged, and I also feel that the company should certainly make an Android handset that rides on its network. I stand by my prior views that if this happens, the stock will be in the $30 range, if not higher. I also do not think RIM can compete strongly in the consumer market against Android and iOS in the long term. But for the stock to work into the $24-30 range, it doesn't need consumer market share. It just needs to hold current subs and slowly regain some of that lost enterprise share.
Again, the breakeven for RIM on BlackBerry 10 is in the 15-16 million unit mark by my numbers (18 million by Wall Street numbers), and I see the company getting those sales within three full quarters versus a full year. If the company does it in fewer than three full quarters, then analyst projected EPS numbers of -$.53 will be off by as much as $1.50-2.00.
Bottom line: RIM makes my Top Spec list but not my Top Tech list, as I still don't view the stock as a strong long-term investment. If RIM were to make an Android handset, I would instantly list it as a small core investment. Other factors that could also move my long-term investment thesis on the stock would be proven share gains in the enterprise and increasing net cash closer to the $4 billion area. Broadcom
Simply put, Broadcom
(NASDAQ:BRCM) stock has not performed nearly as well as the company has in the last year. The company benefited from strong mobility revenues in 2012, but roughly half of the company's core markets were flat to down during the year. That should change materially in the next couple of years as core network and wireless infrastructure ramps up. This should also prompt many to start switching to new forms of data storage, for which Broadcom has high-margin products on offer. Moreover, TV sales are likely to get a little better with smart/connected TVs, where BRCM should have increasing content.
Lastly, a potential upside kicker lies in software-defined networking, or SDN. If SDN really accelerates to the detriment of Cisco (NASDAQ:CSCO) or Juniper (NYSE:JNPR), (which, by the way, I very much doubt), this would be a boon in the network and storage areas for the internal silicon and chip suppliers. That means Broadcom, EZchip (NASDAQ:EZCH), and Cavium (NASDAQ:CAVM) primarily, but Broadcom has a much broader portfolio. This is because the companies deploying custom SDN solutions would still need the internal chips that make this SDN stuff work. Therefore, the silicon merchants in high-capacity networking would greatly benefit, and Broadcom is pretty clearly the market share leader here.
Like Google, this name will be in my list for a two- or three-year period.
Please refer to my above note on Broadcom as I detail one of the upside kickers for this name. While it’s a risky bet, the company has plenty of catalysts with a rash of design wins into the next wave of routing and edge routing design wins at Cisco, Alcatel-Lucent (NYSE:ALU), Huawei (SHE:002502), and Ericsson (NASDAQ:ERIC). These design wins should enable the company to multiply its current revenues by a factor of between three and five. And the beauty of EZchip’s model is that volume shipments into these future designs carry a very high gross margin.
While I'm not currently in this name, I do intend to get back in. There has been some controversy of late with a negative SeekingAlpha piece. One of the main premises of that piece was that EZchip has never produced the "hockey stick" increase in revenues. That is completely untrue; when I first started following EZCH (then LNOP) in the mid 2000s, the company was only doing just a few hundred grand of revenue per quarter for around $1.5 million per annum. This last year, even with revenues down by over 15%, the company produced over $50 million in revenue, or $13 to 15 million per quarter.
In fact, EZchip has produced at least two huge hockey stick type moves in revenue growth and is expected to do another such move. Moreover, it's also gone from having a balance sheet with very little cash to having over $125 million. Again, this demonstrates the leverage in the high gross margins.
To me, the biggest risk with EZchip is competition, and competing against Broadcom is very tough. In the future, the company could potentially compete against Qualcomm (NASDAQ:QCOM) or Intel (NASDAQ:INTC). Cavium has also produced some very good designs, and the venture pipeline has companies with novel chip designs as well. Given these factors, I keep the position size on EZchip and other Spec positions quite a bit smaller than positions like Google. I also believe, however, that the potential upside is compelling, and I've had notable success in this name in the past.
Yes, you are reading that right: Acme Packet
(NASDAQ:APKT) is a Top Tech and not just a Top Spec. The reason here is simple: I believe Acme is going to be a notable earnings growth winner and has two product cycles instead of just one to benefit from. I see the migration to 4G/LTE being as strong a catalyst as my renewed spending thesis, which predicts a wave of spending on networking/high capacity bandwidth upgrades. In fact, we could see Acme produce two runs this year. The first half of the year could/should be driven by core networking strength, which reignites the core products in Acme's portfolio. The back half of the year should be driven by the company growing orders and gaining share in core 4G investment/upgrades.
Even though different in industry, the catalysts here are similar to Facebook's. Negativity got too extreme last year, valuation is not as rich as many think, and notable revenue and earnings acceleration are in the offing.
From a valuation standpoint, many point to a high PE, and that sort of short-sighted view isn't going to work on this name. First, it’s not nearly as expensive as many claim, since the company is only trading at 4X net cash, and roughly 4.5X revenues. That multiple on revenues is similar to Riverbed
(NASDAQ:RVBD) or Radware
(NASDAQ:RDWR). It's also lower than F5 Networks
(NASDAQ:FFIV) and Citrix
(NASDAQ:CTXS), and much lower than names like Allot Communications
(NASDAQ:ALLT) and Procera
(NASDAQ:PKT). And I'd argue that the EPS acceleration (and revenue growth) for Acme in the next one to two years should be higher than most if not all of those names. Further, Acme has produced a $1.00 gain in EPS before, and I would be surprised if it doesn’t materially exceed that level again. Therefore, anything in the $1.20-1.50 area for EPS puts the PE in a very modest range for this name.
Bottom line: While this name is highly volatile, the company has returned to earnings stability and maintained strong cash flow while not having produced a notable upside quarter in over a year. When that upside quarter occurs, I expect the stock to retake the low- to mid-$30s. If the back half then produces the 4G spending in developed countries that I expect, we could see further gains from those mid-$30s levels.
While I didn't make the communications semis a field bet and went with Broadcom (so far), I am going to make my fiber field bet a top pick in both the Top Tech and Top Specs for the year. Specifically, CIENA
(NASDAQ:CIEN) is the Top Tech, and JDS Uniphase
(NASDAQ:JDSU) and Finisar
(NASDAQ:FNSR) are Top Specs.
To be clear, CIENA is my favored name in the fiber field bet. However, any of these three could produce the greatest return. Also, I personally would have a hard time owning CIENA and not at least one of those two other names. Frankly, I’d prefer to own all three. My position sizes change in these names depending on price, but over time I've owned more of CIENA than the other two.
Some history: I was aggressively building this position from 2008 and then largely lightening this field bet from late 2010 into early 2011. Since then, I have added them back and sold parcels many times. Obviously, if I were fully clairvoyant, I would have completely shed this group and then of course picked each one back up at perfect lows. But I can't do that and don't think anyone can. However, I have made a number of good value-added trades in the last couple years (especially on CIENA) and plan on continuing to do so.
So here's the short-and-sweet skinny on each one. CIENA
This name is strongly levered to the improving global carrier budgets, the root of which is driven by the incessant demand for more Internet bandwidth. In my view, this company has the best leverage to 100G bandwidth (and beyond). The proliferation of 4G/LTE is also a significant driver of the move to 100G and beyond as all that wireless bandwidth is offloaded to various core networks. In addition to organic growth, I see CIENA as a margin improvement story in regards to the company's selling cycles. CIENA's sales essentially come in two phases: the initial solution "win" and then upgrades to meet bandwidth growth. The win is the "big box" (i.e., long haul optical routing) and then linecards for the upgrades. The linecards are literally inserted into the boxes as the need for future bandwidth grows, and the margins on the cards is much higher than on the initial implementation. The key here is that in the last 18 months, CIENA has increased its customer footprint and installed a strong number of 100G big box solutions, but has not seen a meaningful increase in the sales of cards to fill these systems. To be clear, the company can sell a lot more of both, but the leverage and key to a big lift in EPS acceleration is greater card penetration. I believe that 2013 (and really, the next two or three years) should see much stronger sales than we have seen since the mini-build phase we saw in 2010.
JDS is more levered to the test and measurement (T&M) segment, which represents over 40% of the company's sales. The other key area is selling optical components to companies like CIENA (as well as Cisco, Huawei, et al.). Therefore, 100G solutions as well as 4G/LTE migration are also strong drivers for JDS, but the timing is different. In the optical components, the sales will more closely mirror CIENA’s solution and card expansion sales, while T&M tends to see a lagging cycle effect. The good news, again, is that system sales have been relatively strong over the last 18 months, so my best guess is that T&M should start to lift, but can also increase as additional bandwidth needs grow.
Finisar is the purest play and also the broadest maker of optical components. This company makes just about every key component needed in the industry, if not all of them. One of my thesis points on Finisar is that it has been an aggressive acquirer of some of the best assets globally during the long optical bust. This has allowed the company to focus on the key growth areas and divest underperforming assets of the acquired companies. This is why Finisar is positioned with one of the best margin and cash flow production profiles once it surpasses its break-even revenue level. The rub is that the industry sales tend to be hyper-cyclical, and inventory lead times have continued to shorten; that is to say, industry orders and sales are all or nothing. So the company is either fighting to manage that break-even line lower, or going great guns trying to fulfill orders.
Bottom line: This group has been trying, to say the least, since early in 2011, but we also haven't seen meaningful network carrier upgrades and budget increases since 2010. We now have AT&T
(NYSE:S) (with Softbank’s
(PINK:SFTBF) money), and T-Mobile all boosting budgets for the next two years. Verizon
(NYSE:VZ) could also shift part of its budget from wireless to the network core, and the European and Asia-Pacific regions are expected to see stable to increasing spending in the foreseeable future. Any and all of this should serve to produce an improving sales cycle for the group.
Okay, I'll admit that I'm still working on this area. The question is whether I should break out one or two of these names for inclusion in one or both lists or just go with a field bet here. If I go with a field bet, than this is an easy call for Top Tech inclusion, and I could further define the list to Broadcom, Skyworks, and Avago
(NASDAQ:AVGO) with TriQuint Semiconductor
(NASDAQ:TQNT) as a Spec kicker. Further, I could even throw in Marvell
(NASDAQ:MRVL) as a strong potential January Effect entrant and then take the easy way out and just say Qualcomm like the rest of the world does now.
Again, I've written volumes on most of these, and even though the results here have been mixed, I've been involved with these names since the mid 2000s (or earlier) and have been writing about them on the Buzz & Banter (click here for a free trial
) since 2007. And the one thing that keeps becoming more clear is that my top names in the group keep gaining share, global technology prominence, and, in some areas, market dominance.
Anyway, where I am leaning right now is pretty clear: a smaller list field bet. Broadcom is still my best chip company on the planet, as it is hugely undervalued and networking is on the comeback trail. Skyworks still looks to have disruptive potential in 4G silicon mobility content. Avago is poised to be a huge winner if fiber optics gets just one more carrier to join the bandwidth/budget increase parade.
So while TriQuint could just get bought out and Qualcomm is still the cash flow king of the group, I think Broadcom is still poised to close the 80% performance gap with Qualcomm that has existed since mid-2010.
To review, here's a look at my two lists:
TOP TECHS: Google, Broadcom, Facebook, Acme Packet, CIENA, Skyworks
TOP SPECS: Research In Motion, Facebook, EZchip, JDS Uniphase, Finisar, TriQuint
Sean Udall is the author of the TechStrat Report, a tech focused newsletter. The following is a free sample. Take a free trial!
Disclosure: Minyanville has a commercial relationship with RIM.