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.
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:T), Sprint (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!
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