Goldman Sachs' top technology-stock picks for this year include ever-popular performers such as Apple , maker of the iPad and iPhone, to companies only known within their industries, such as chip-equipment manufacturer Teradyne .
The New York-based investment bank gives price targets and the premiums they represent to their closing price as of Dec. 29, 2010. Each company gets a "buy" rating on Goldman Sachs' so-called Conviction Buy List. On the list are eight technology stocks.
Technology stocks are off to a roaring start this year as the prospects of an economic rebound fuel hopes that businesses and consumers will spend big. The chip sector has rebounded strongly after a prolonged recession, and the question is now whether that can be sustained.
Semiconductor stocks, as tracked by Morningstar, are up 5.4 per cent this year, while semiconductor-equipment and materials shares are up 8.1 per cent, and communications-equipment stocks are up an average of 11 per cent. The S&P 500 Index has gained 3.2 per cent so far in 2011.
Below are the stocks, in order, of Goldman Sachs' projected share-price return potential, ranked from least to most.
Teradyne's shares have already exceeded Goldman Sachs' six-month price target of $16, having recently topped $16.25, the highest since August 2007.
The company is a manufacturer of automated semiconductor test equipment used by chip makers and telecommunications products makers. It is in a highly cyclical and highly competitive industry. On Jan. 26, Teradyne reported fourth-quarter earnings that more than tripled those of the previous year at $60.1-million, or 27 cents per share, from $16.9-million, or 9 cents, a year earlier.
Teradyne's price-to-earnings ratio is 9.2, versus the 21.7 of its industry group, and half that of the S&P 500 average, indicating it still may be very cheap. The company predicts that for the first quarter, it will earn 33 cents to 39 cents per share on revenue in the range of $350-million to $375-million. Analysts' outlook is for first-quarter earnings of 19 cents per share and revenue of $295-million. Goldman's analyst said in a research note that "with orders now 35 per cent below peak and expectations reset, we would add to positions as we continue to expect orders to move higher in 2011."
Goldman continued: "Given our expectation of more than $2 per share of free cash flow through 2011, we also expect Teradyne to initiate a (share) buy back." Goldman Sachs expects Teradyne to earn $1.15 per share in 2011. Teradyne shares are up 45 per cent over the past 12 months.
Oracle , the undisputed leader in the database software industry, gets a price target of $36, based on expectations that it can successfully broaden its offerings to become a major provider of enterprise software solutions. The acquisition of Sun Microsystems a year ago will enable the firm to further its strategy of providing complete IT services to its clients. It is operating off a strong base as software licensing updates and product support account for about 50 per cent of its revenue and is the most profitable segment.
Goldman Sachs said in a Jan. 18 research report that it likes the company's expansion into the hardware sector for its long-term growth potential, as well as its continued profit margin expansion. And it said Oracle trades at a relatively cheap 13.1 price-to-earnings ratio based on the investment firm's 2012 earnings per share estimate. That ratio is well below the software group's median P/E of 19.4.
Standard & Poor's, which has Oracle rated "strong buy," said it expects sales to rise 31 per cent in fiscal 2011, to $35-billion, including $7.5-billion of projected hardware systems and support sales gained through its Sun acquisition. It has a fiscal 2011 earnings estimate of $2 per share growing to $2.17 in fiscal 2012. It has a $37 price target on Oracle shares.
A Morningstar analyst notes that "Oracle's revenue growth and operating profits highlight management's impressive track record of successfully identifying, buying and integrating smaller software companies." It projects a compounded annual revenue growth rate of 12 per cent during the next five years, which includes additional revenues from the acquisition of Sun. Shares are up 4 per cent this year after gaining 28 per cent last year.
Qualcomm , a leader in the digital wireless telecommunications sector, gets a $59 price target, a 14 per cent premium to current prices, from Goldman Sachs. The company owns more than 10,000 patents that make up the key components to wireless telecommunications that enable cell phone usage and connectivity and the growing use of smartphones. It is already is one of the world's largest chipmakers and a key supplier to wireless handset makers.
It's been a busy month for the company. On Wednesday, Qualcomm reported record revenue for its fiscal first quarter and raised its fiscal 2011 revenue outlook by a whopping $1.2-billion. Fiscal first-quarter revenue was a record $3.35-billion, up 25 per cent year-over-year. Earnings per share also were a record, at 82 cents per share, up 32 per cent. CEO Paul Jacobs told analysts on a conference call that it was the best quarter in company history. And two weeks ago, the company announced its acquisition of Atheros for $3.2-billion to diversify its product portfolio beyond mobile phones and expand its addressable market into game consoles, media players, tablets and TVs.
Standard & Poor's, which has a "buy" rating on the company, gives it a 12-month $64 price target. It forecasts revenue growth of 18 per cent in fiscal 2011 and 5.9 per cent in 2012. It said it expects the Atheros deal will be mildly accretive to earnings and it will strengthen the company's position in the chipset market, particularly as it looks to pursue a larger piece of the burgeoning computer tablet market. Tablets are essentially hybrids of a personal computer and a smartphone. An S&P poll of analysts found 13 "buy" ratings, 19 "buy/holds," seven "holds," two "weak/holds" and one "sell." Shares are up 4.8 per cent this year after gaining 8.6 per cent last year.
Broadcom makes semiconductors for broadband communications markets, including cable set-top boxes, cable modems, office networks and home networking. Its shares earn a $52 price target, meaning a 15 per cent upside from current prices from Goldman Sachs. That price is based on a price-to-earnings multiple of 20 times the firm's projected earnings estimate of $2.60 per share in 2011.
Broadcom is scheduled to release fourth-quarter earnings Feb. 1 of an estimated 74 cents. Last year it earned 49 cents per share in the quarter. For fiscal 2010, analysts estimate, per Standard & Poor's, earnings of $2.71 a share, growing 8 per cent in 2011 to $2.92 a share.
Broadcom has about a 30 per cent market share of the $4.4-billion connectivity chip market, which includes Wi-Fi, GPS and Bluetooth, and about a 24 per cent market share of the $2.1-billion standalone Wi-Fi chip market. Morningstar notes that the company was sitting on $2.8-billion at the end of the third quarter, took on new debt and so is in prime position to make acquisitions.
Both consumer demand and technological innovation are pushing converged devices, such as the Apple iPhone. And Broadcom has demonstrated proficiency for integrating such functions onto a single chip. Standard & Poor's, which has a "hold" rating on Broadcom, said it anticipates sales rose 50 per cent last year and will climb 10 per cent in 2011.
"We see expansion of broadband services and IT spending providing long-term growth opportunities for (its) broadband communication and enterprise networking businesses." And recent design wins "for various combination wireless and mobile handset products will help boost mobile and wireless networking sales as its customers ramp production of new products," writes the S&P analyst.
Analysts give its shares nine "buy" ratings, 12 "buy/holds," 14 "holds," three "weak/hold" and one "sell," according to an S&P poll of analysts. Shares are up 4 per cent this year.
SuccessFactors , which provides software that helps firms automate, streamline and build consistency in the hiring and management of employees, earns a $35 12-month price target from Goldman Sachs, a 19 per cent premium to current prices.
Goldman bases its outlook on upward revision to its revenue and earnings estimates for 2011, which includes a view that a recovering economy will boost hiring. The company's fourth-quarter and 2010 earnings are due to be released Feb. 9. Goldman's profit model calls for 2010 revenue of $205-million and a loss of 23 cents per share; revenue of $266-million and a loss of 14 cents per share in 2011; and revenue of $330-million and earnings of 8 cents per share for 2012.
Standard & Poor's, which has a "buy" rating on the shares, says the company is investing heavily in future growth, and so operating expenses will be around 96 per cent of revenue in 2010 and 2011, and, after factoring in stock-based compensation expense, costs are expected to exceed revenues. It expects a loss of 7 cents per share in the fourth quarter and a 26-cent loss per share for 2010. Its poll of analysts resulted in a mean estimate of earnings per share of 11 cents for 2011, or a 57 per cent increase. Shares are up 2.4 per cent this year.
Juniper Networks , a designer and manufacturer of network hardware and software and a key player in the carrier router industry, gets a 12-month price target of $44 from Goldman Sachs based on a price-to-earnings multiple of 26 to its 2011 earnings estimate of $1.70 per share.
"We expect accelerating growth in 2011 to drive upside to (Wall) Street estimates and the stock's multiple," the investment bank said in a Jan. 25 research note.
On Wednesday, Juniper posted revenue of $1.19-billion, up 26 per cent on the prior year's quarter, and topping analysts' estimate of $1.12-billion. It earned 42 cents per share, a 31 per cent hike over the same period last year and besting analysts' estimate of 37 cents per share.
Juniper competes head-to-head with Cisco in both the carrier router and enterprise switch businesses. The demand in that niche is expected to be strong as wireless carriers upgrade their networks to the next generation of technology over the next few years and because the industry is at the beginning of a replacement cycle following a depressed 2009. Shares are up 0.4 per cent this year.
Sapient , a business consulting and IT services provider, gets a $15.50 12-month price target, a 24 per cent premium to the year-end price, from Goldman Sachs.
Its forward price-to-earnings ratio of 17.2 is roughly in line with its sub-industry's average P/E of 20, so it is relatively cheap on the basis of that comparison. Goldman said in a Nov. 11 research note that the company, which has a strong presence in interactive marketing, trading and risk management, is "one of the few investments with direct exposure to the twin waves of technology and secular growth of interactive spending. Together, these waves are expected to power robust revenue growth of 27 per cent to 28 per cent through 2012. We expect future share performance to be powered by sustained leading revenue growth and expanding operating margins."
The company is due to release fourth-quarter earnings on Feb. 15 and is expected to report 11 cents per share, flat to last year. Its shares are up 4 per cent this year.
Apple, the maker of the iPod and iPhone, garners a $450 price target from Goldman over the next 12 months, a 31 per cent premium to its current price. That target is a $20 upward revision from the previous target. The company's fourth-quarter results handily exceeded the investment bank's estimates and "March quarter guidance for revenues and EPS of $22-billion and $4.90 was far higher than our estimate for $20.9-billion and $4.49 (consensus of $20.8-billion and $4.47)," Goldman said in a Jan. 19 research note.
It adds that sales of iPod and phone have been far stronger than most expected which is expected to continue the company's rising earnings juggernaut. Despite its seemingly lofty price ($343.50 on Jan. 27), its forward price-to-earnings ratio of 19 is less than the 19.7 of its industry group. Apple's management lineage is in question as founder Steve Jobs announced a little over a week ago that he's taking medical leave again.
Jobs has been a tough company director for the past decade, which is credited with bringing the company to new heights in product innovation and profitability. So the impact of his absence is seen by some as a big unknown, and putting a cloud over the company's long-term potential. Apple's shares are up 11 per cent over the past three months and 68 per cent over 12 months.