Top 10 Tech Stocks for 2013: Are Facebook, Broadcom, EZchip, and RIM Set to Gain?
The tech sector is a sea of battling companies, but some names are hinting that they'll stand out in the coming year.
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.
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.
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