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All Contents © 2019The Kiplinger Washington Editors
By Dana Blankenhorn, Contributing Writer
| July 9, 2018
There is a rule in technology called the 90-9-1 rule, and it usually holds true. Leading tech stocks tend to dominate 90% of the market, the second-place company gets 9%, and everyone else scraps for the remaining 1%.
If you’re an investor, the rule is simpler: Go with the winner.
This is where we get the word “WinTel” from. WinTel described the virtual PC monopoly held by the Microsoft (MSFT) Windows operating system, running on Intel (INTC) hardware, 20 years ago. You could have owned Apple (AAPL) in 1994, or Advanced Micro Devices (AMD), but in terms of the market as it was at the time, you would have been wrong.
You go with a winner until it’s no longer winning, notes Rich Winer, a wealth adviser with Steel Peak Wealth Management LLC in Woodland Hills, California. “People assume that just because a company has had a strong run, that the run has to end,” he says.
The end of the run isn’t based on valuation, but technology. Winners become losers only when their niches are destroyed, as Nokia (NOK) flip phones were destroyed by the Apple iPhone, or as Canon film cameras were by digital cameras.
The following 9 tech stocks are today’s modern-day corporate kings. For now, you want to own them – not based on any sort of relative valuation, but on the continued strength of their niches. As long as they have “runway,” or growth potential, stay in them.
Market value: $493.0 billion
China e-commerce giant Alibaba (BABA, $192.27) is just about as dominant as Amazon.com (AMZN) is in China, only it’s even more profitable.
Alibaba was not, until recently, much of a direct merchant, which involves warehouses and the expense of inventory. It was an intermediary, between small goods producers and retailers. Only in the past few years has it begun building out its physical infrastructure.
This has impacted Alibaba’s profitability; it earned about $1 billion in its most recent quarter, on revenue of about $3.6 billion. That’s just more than half the net income of a year earlier, on 45% more revenue.
But the pros still love Alibaba.
For one, 46 of 47 analysts currently covering BABA shares consider them an “Overweight” or “Buy.” Allyson Berry, an account coordinator at BackBay Communications in Boston, goes one step further, calling Alibaba “the perfect stock.”
“Its fundamentals are super strong, and institutions are buying it with both hands,” she says. “I have been doing the same and have more than doubled my money since I began doing so in November 2016.”
That’s because Alibaba also is becoming the dominant cloud player in its home market, expanding around the world. Meanwhile, it continues to expand its e-commerce services across fast-growing markets in South and Southeast Asia, including payment services. It has a clear runway to keep growing.
Market value: $806.7 billion
Alphabet (GOOGL, $1,155.08) division Google has been the leader in Internet search for so long that the names of its onetime competitors — such as Excite, Ask Jeeves and Altavista — are now nearly forgotten. When you search for something online, you “Google” it.
Google defined the space by focusing all its attention on the service, not on monetizing it, and by offering a clean, simple interface. Its purchases of DoubleClick and YouTube in the mid-2000s sent revenues and profits into overdrive. In 2017 its gross profit came to $65 billion, which came on $110 billion in revenue. Even after building new cloud data centers, entering numerous consumer markets and relaunching YouTube Red as a paid media distribution channel, Alphabet still had net income of more than $12 billion.
Expansion in new directions naturally carries new risks. Josh Blechman, director of capital markets at exchange-traded fund provider Exponential ETFs, doesn’t worry about those risks, saying the company is still well-positioned “as media consumption continues to move away from the television.”
There is now “a generation of kids growing up with the notion of a household without a cable box,” he says, allowing the company to redefine the entertainment as well as information-gathering experience. The company’s strong cash flow has also let it invest in “moonshots” such as self-driving cars, Google Fiber and Nest intelligent devices that will define its future.
Despite a market cap of almost $800 billion, and despite shares selling at roughly 50 times last year’s earnings and nearly seven times sales, 39 of 44 analysts give the stock a buy-equivalent rating.
Market value: $839.3 billion
Amazon.com (AMZN, $1,710.63) isn’t just the dominant player in e-commerce, with about half the U.S. market.
It is the dominant player in cloud computing.
Amazon has become king of the cloud by doing just what it did with its online store: It rented it. Hundreds of thousands of merchants operate on Amazon’s website. Some have their orders shipped by Amazon, others only use sales services. All Amazon did, in 2006, was apply this model to its cloud data centers. Amazon Web Services was born.
AWS had $5.4 billion in revenue during the first quarter of 2018, up 49% from a year earlier. Among its big customers are Netflix (NFLX), which recently became worth more than any other entertainment company — more than Walt Disney (DIS), even more than Comcast (CMCSA).
Amazon’s stock is laughable in so many ways. It trades for more than $1,700 per share, at a price-to-earnings ratio of 217 times trailing profits, and 85 times next year’s. It trades at 5 times sales. And yet … 45 of 47 analysts think the stock is buy-worthy, and the other two think it’s at least worth holding on to if you’ve already got it.
Levi Sanchez, co-founder of Millennial Wealth in Seattle, agrees. “They make all their decisions based on data, and they’re not afraid to operate at a loss to gain market share,” he says.
Amazon’s cloud cash flow “allows them to fund their ambitions across retail, entertainment and devices,” adds Mark Stoeckle, CEO and Portfolio Manager at Adams Funds in Baltimore.
Market value: $100.3 billion
Remember Priceline? Well, the “name your price” hotel site which had Star Trek actor William Shatner as its spokesman for years, has grown up.
Since buying European site Booking.Com in 2005, Booking Holdings (BKNG, $2,086.93) has acquired a host of other travel sites, including Kayak and OpenTable, and created a virtual “duopoly” in the U.S. hotel booking industry with rival Expedia (EXPE). (Priceline holds the larger market share.)
The company shuns stock splits, so there are only 48 million shares. But each one now costs roughly $2,100, which is nearly twice the price of just three years ago. The company posted earnings of $77.03 per share in the previous fiscal year, and shares trade at more than 40 times earnings. But the company’s financial results have been precise stairsteps, with sales and profits both doubling over the past five years.
Two-thirds of analysts covering the stock have it on their “buy” lists, and on the whole, expect earnings of more than $100 per share by fiscal 2019.
Travel isn’t just about hotels, by the way. Priceline sells air tickets, rents cars and even leads the better-known AirBnB in longer-term vacation rentals of homes and apartments. The company is investing heavily in chatbots, too, to reduce the cost of telephone operators. The company says its AI-driven bots can answer half of all post-booking questions from travelers.
Courtesy Hookmeupbarb via Wikimedia
Market value: $21.0 billion
Few technology companies have been industry leaders for as long as Cerner (CERN, $62.96), the kings of hospital record keeping.
The company has warded off challenges from mainstream technology companies such as Microsoft, Oracle (ORCL) and Alphabet over the past decade, and has about 17% of its target market.
Cerner was founded in 1979 by Arthur Andersen accountants, taking its current name in 1984, then going public in 1986. The company’s value has risen sixfold since the current recovery began, buoyed by a series of acquisitions and winning the $4.3 billion contract to manage electronic health records (EHRs) for the Department of Defense. It also won the Veterans Affairs business, finalizing a 10-year contract in May.
Net income has been growing 20% annually for years, and the company has nearly as much ready cash ($413 million) as long-term debt ($439 million). Operating cash flow has grown at roughly 17% annually, reaching $438 million in 2017.
More than half of analysts covering the stock think it’s a buy, with the remainder suggesting holding on at the very least.
Market value: $62.7 billion
Memory chip maker Micron (MU, $53.23) is among the least-loved tech stocks on the market right now, at least based on its valuation.
Micron lives in a sector of the market that has seen regular boom-and-bust cycles. As a result, you still can buy it for about 5 times last year’s earnings of about 7 times last year’s earnings.
This boom may be different. Memory chips are finally cheap enough to replace disk memory in many applications. Your phone runs on chip memory, and so do most laptops today. Chip memory is even replacing disk memory in many clouds because it’s faster and more reliable.
So far, the boom in memory shows no signs of ending. After delivering revenue of $20.3 billion in fiscal 2017, Micron had revenue of $6.8 billion in its first fiscal quarter of 2018, then $7.3 billion in its next quarter. The company then reported $7.8 billion in the quarter reported in June. That puts the company on track to reach more than $29 billion in revenue for the year — a nearly 50% growth rate.
The company’s profits are also accelerating, hitting $5.9 billion in the second quarter alone, then another $3.8 billion in its most recent quarter — topping analyst estimates.
You’d think analysts would be screaming “buy,” and most are — 26 of 34 like it, though seven have it as a “hold” and one even rates it a “sell.” A few analysts still are trying to tease out when the current tech boom might end.
Even when that happens, however, Micron should still be cheap as chips.
Market value: $150.6 billion
Nvidia (NVDA, $247.33) originally was known as a “graphics chip” company, with a niche in helping video game players see more realism with less latency.
That hasn’t changed — Nvidia dominates this market. But the same hardware techniques used to make Lara Croft smile are also at the heart of self-driving cars, solving cryptographic puzzles and delivering artificial intelligence from clouds. This has sent the shares of Nvidia up 370% in the past two years.
Has it come too far too fast? Not so, says Ron Weiner, managing partner and director of RDM Financial Group at HighTower in Westport, Connecticut. “Just think about how many chips will be needed to power an autonomous vehicle in the future, with artificial intelligence, the Internet of Things and data centers,” he says.
The autonomous vehicle market — just one of Nvidia’s niches — is expected to be worth $60 billion by 2035, the company says. As artificial intelligence continues to make our lives easier, Nvidia will be at the heart of it, Weiner says.
Allyson Berry of Backbay Communications in Boston agrees, saying Nvidia’s results fit squarely in their 15-stock momentum growth strategy index — one whose approach is based on that of Investor’s Business Daily founder William O’Neil.
Despite Nvidia’s rapid rise, other analysts are quickly lining up with this position. Assuming it can meet its current earnings estimate of $7.25 per share this year — and it has regularly been powering past quarterly estimates by 50 cents per share and more – it would have a P/E of 34. That’s a bargain for this company’s future growth prospects.
Market value: $104.8 billion
As good as it is to be a dominant cloud player, sometimes it’s better to be a major cloud user. Salesforce.com (CRM, $141.40) illustrates this point.
Salesforce has led the move of business applications to the cloud, which has been a key to industrial transformation this decade.
Salesforce grew into its $100 billion market cap by putting database applications in the cloud and selling them through a monthly subscription.
This began with customer relationship management (hence the CRM ticker), but it now boasts cloud offerings covering sales, service and applications, as well as marketing. The company is expected to grow sales at more than 20% annually in each of the next two years. Revenues of $3 billion for the quarter ended in April resulted in $344 million (11%) in net income.
Steve Koenig, Managing Director for Wedbush Securities in Los Angeles, says it can still outperform. He has a $150 price target on shares that were selling for $139 in mid-June, believing its recent acquisition of MuleSoft provides “the capability to unlock data trapped in isolated systems and accelerate customers’ digital transformations.” He sees the valuation as attractive, and thinks CRM has a “long runway for growth.”
Courtesy Alyssa Ringler via Wikimedia
Market value: $4.1 billion
The smallest company, and the smallest niche, among these kingly tech stocks is Teladoc (TDOC, $63.35), which has a market cap of just more than $4 billion but a solid lead in the business of connecting doctors with patients remotely. If you live in a big city, you may have never heard of Teladoc. If you’re in the wilds of Alaska, they may be essential.
The company has been on a buying spree, most recently acquiring Advance Medical for $352 million in June. Advance adds episodic and complex care to the Teladoc portfolio and offers it the chance to scale globally.
While most health care companies have their fates tied to the U.S. market, Teladoc is increasingly international, with one-third of the 42 million employees currently covered based outside the U.S. Teladoc’s virtual system also lets it tap niches such as mental health service for young males who are otherwise tough to reach.
You will pay for this potential. Teladoc sells for just less than 15 times revenues, and it has yet to show a profit. But when your sales are doubling every year, investors tend to give you a pass. The company is due to report earnings on July 31, with a loss of about 37 cents per share expected on revenue of $92.5 million. That’s more than twice the $44.6 million in sales for the same quarter a year ago.
That’s why 13 of the 16 analysts following Teladoc have a buy rating on the stock. Most of those issuing new reports are upgrading their ratings or raising their price targets.