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All Contents © 2019The Kiplinger Washington Editors
By Harriet Lefton, Contributing Writer
| August 1, 2018
It’s easy to identify the hottest tech stocks of today, but it’s much more difficult to look several years through the fog and determine who’ll still be on top.
But RBC Capital’s analysts have just released a fascinating report, “Imagine: 2025,” highlighting tech stocks they believe will outperform all the way through 2025.
This requires a different set of criteria than would be used for short-term tech analysis. Writes RBC: “Equity valuations are based on the present value of future cash flows. Most analysis is focused on the next quarter or 1-2 years, but rarely is time and effort taken to think about the next 7 years when assessing the valuation of a company.”
This involves 1) identifying themes and norms that will become standard by 2025; and 2) identifying forward-thinking companies most boldly and effectively positioned for this new future.
Here are 10 of the top tech stocks to buy for future growth, according to RBC Capital. We’ll also use TipRanks market data to understand whether now is a compelling time to invest in these technology companies.
Data is as of July 31, 2018. Consensus price targets and ratings based on “Best Performing” analysts. Stocks are listed in alphabetical order.
Market value: $872.6 billion
TipRanks consensus price target: $2,097.97 (18% upside potential)
TipRanks consensus rating: Strong Buy (See Details)
Amazon.com (AMZN, $1,777.44), along with Google parent Alphabet (GOOGL), has invested the most heavily in artificial intelligence, writes RBC Capital. And unlike smaller rivals, AMZN also boasts “the Big Data access and Compute Power infrastructure to benefit the most from AI and ML (machine learning) deployments.”
The sheer size of Amazon’s markets means the company still has a very strong growth outlook, too. RBC writes, “AMZN faces the most large TAMs (total addressable markets) among the Internet companies -- Retail, Cloud, Advertising, Shipping & Logistics, Business Supplies, etc.”
For example, Amazon holds just a 10% share of the massive $20 trillion retail market, and a 10% share of the $1 trillion cloud market.
RBC’s conclusion: Amazon is quickly making its way toward a $1 trillion market cap. Indeed, on very strong Q2 results, top RBC analyst Mark Mahaney (view Mahaney’s TipRanks profile) ramped up his price target from $1,900 to $2,100 per share.
The stock has already posted a remarkable year-to-date run of more than 50%.
Market value: $486.3 billion
TipRanks consensus price target: $209.09 (21% upside potential)
Don’t unfriend Facebook (FB, $172.58) just yet.
Facebook’s shares have been leveled by about 20% following a disappointing second-quarter earnings report. But long-term, the picture remains extremely compelling, and RBC thinks now is the time to jump in.
“This likely constitutes One of the Best Entry Points you can get on FB, in our view,” RBC’s Mahaney wrote after shares’ July 26 plunge. He has a $225 price target on the stock (32% upside potential).
RBC Capital notes that Facebook has made substantial progress in its AI and ML efforts as it moves to capitalize on its massive scale and resources. “The amount of user data FB can leverage – and we point to its 2B+ users on FB platform alone – we think gives the company a unique advantage,” RBC writes. Facebook can use these new AI and ML capabilities to better refine their text analysis, ad targeting and newsfeed sorting, to name a few examples.
Market value: $208.3 billion
TipRanks consensus price target: $228.89 (16% upside potential)
As new markets and technologies flourish, RBC Capital predicts that by 2025, payment flows will surge to approximately $200 trillion – four times the current addressable market. And MasterCard (MA, $198.00) is perfectly positioned to reap the rewards.
“We believe MA (stands) as beacons of ‘Trust’ around the world, which will enable them to capture a disproportionate amount of share in these new payment flows,” RBC Capital writes.
Indeed, RBC Capital’s Daniel Perlin (view Perlin’s TipRanks profile) already has highlighted MasterCard as a top pick. Following solid earnings results, this five-star analyst wrote, “MasterCard remains one of our best ideas in the space given our belief that investors should look to focus on long-term, secular-driven stories that provide solid organic growth with opportunities for margin expansion.”
So far, his bet is on the money. MA is up 32% since the start of the year.
Market value: $61.8 billion
TipRanks consensus price target: $84.68 (60% upside potential)
Red-hot chip stock Micron (MU, $52.79) manufactures semiconductor devices, primarily NAND and DRAM memory. Luckily for MU, all roads in 2025 lead to data creation, says RBC Capital.
“To the extent that transpires we see MU with their DRAM * NAND portfolio as well positioned,” its analysts write.
While DRAM markets historically have gone through severe boom/bust cycles, RBC Capital is confident that the cycle(s) going forward will be more muted and less volatile. “This inherently means that memory companies broadly should earn more profits and FCF over the cycle than historical trends would suggest” writes RBC analyst Amit Daryanani (view Daryanani’s TipRanks profile). He has an $83 price target on the stock, implying 57% upside potential.
That would be quite the feather in the cap of current shareholders, who are already enjoying 87% returns over the past 52 weeks.
Market value: $814.4 billion
TipRanks consensus price target: $120.63 (14% upside potential)
For RBC Capital, Microsoft (MSFT, $106.08) represents a “leading hyperscale hybrid cloud platform with big runway of growth in AI, IoT, Gaming and other services.”
Microsoft CEO Satya Nadella told investors at a recent conference: “AI is going to be one of the trends that is going to be the next big shift in technology.” He is placing AI at the heart of Microsoft’s strategy and product development. “It’s going to be AI at the edge, AI in the cloud, AI as part of SaaS applications, AI as part of, in fact, even infrastructure,” Nadella said.
Already, Microsoft’s Azure cloud platform powers multiple AI projects, including enabling developers to create powerful artificial-intelligence applications and chatbots. One example: Microsoft’s Cognitive Services, which enables developers to easily add AI capabilities such as speech recognition, voice synthesis and search to their applications.
So far, these efforts (and others) are paying off; MSFT stock is up 23% year-to-date.
Market value: $147.4 billion
TipRanks consensus price target: $397.61 (18% upside potential)
TipRanks consensus rating: Moderate Buy (See Details)
Like Facebook, Netflix (NFLX, $337.45) disappointed investors with its most recent earnings report; shares are now down 15% during the past few weeks after the streaming-video company reported lower-than-expected subscriber additions.
But RBC’s Mark Mahaney (view Mahaney’s TipRanks profile) thinks the bull story behind NFLX – which still is up 70% year-to-date – remains firmly intact.
“After 4 very strong quarters, Netflix had a weak Q2. We’ve seen this story before (i.e. Q2:16), but note that long-term fundamental trends remain intact, and Q2 generally has some lumpiness,” Mahaney writes, maintaining a “Buy” rating and a $360 price target.
Longer-term, RBC believes Netflix is heading in the right direction with its AI focus. “Given its 120MM subscriber base, NFLX has the data and resources to leverage AI technology,” its analysts write. “Today NFLX uses AI technology for content promotion and targeting, content price optimization, programmatic marketing, and improving streaming quality, to name a few.”
“One of the company’s experiments (includes) creating software-edited trailers that are personalized for each subscriber, increasing the likelihood of those viewers to watch the movie,” RBC writes.
Market value: $148.8 billion
TipRanks consensus price target: $292.82 (20% upside potential)
RBC calls Nvidia (NVDA, $244.86) a “leader in AI.”
Nvidia’s graphics processing unit (GPU) chips are perhaps best-known for their gaming capabilities, but they’re increasingly being used for data-heavy AI applications. GPUs are the engines of visual computing; they enable computers to understand, create and enhance images. As a result, these chips play a role in everything from gaming to data centers to self-driving vehicles.
The best part is that a strong competitor has yet to emerge, especially in self-driving, where RBC sees Nvidia emerging as the “winner.”
Indeed, Nvidia is ramping up its auto efforts to take advantage of the shift to smart cars with complex data needs: Think speech-to-text interface, internet-connected devices, proximity sensing, and self-driving potential as well as increasingly advanced display technologies.
NVDA has been among the best tech stocks of the past couple years, up 320% since this point in 2016. But analysts broadly see at least 20% more upside potential from here, and those targets might continue to climb if Nvidia continues to trounce expectations.
Market value: $98.2 billion
TipRanks consensus price target: $97.46 (18% upside potential)
PayPal (PYPL, $82.14) is all set to tap the long-term global shift to digital commerce. Not only is it a champion of worldwide democratized finance, but it also is capitalizing on the digitization of retail and financial services. “We believe PayPal’s above peer growth rates should be sustainable and could accelerate with incremental capital deployment, given its strong cash position,” RBC’s Daniel Perlin writes.
PayPal differentiates itself from competitors by offering an open platform that is designed for both merchant and consumers, the analyst firm says. “PYPL brings scale and a unique two-sided model (relationships with both consumers and merchants), which allows them to control the entire consumer experience.”
So while PayPal is reeling in the short-term following sales guidance that fell short of analysts’ hopes, RBC still thinks PayPal will play a critical role in tapping the roughly 2 billion people around the world who lack financial services. In fact, Perlin actually ramped up his price target from $87 to $95 shortly after PayPal’s report.
Courtesy Satyaki.snow via Wikimedia Commons
Market value: $31.7 billion
TipRanks consensus price target: $202.37 (15% upside potential)
This rapidly growing IT cloud company still is up more than 30% year-to-date despite a post-earnings retreat. Essentially, ServiceNow (NOW, $175.96) transforms information technology for global businesses by managing all their IT service relationships. This can involve creating a single system of record for IT and automating manual tasks, or standardizing processes and consolidating legacy systems.
“We think NOW is exposed to large and growing areas of spend in several next-gen areas including automation and machine learning,” writes RBC Capital. The firm calls ServiceNow a “favorite” because the company “is operating at a different gear than peers as the flywheel of a true multi-product and profitable platform company spins at a rapid rate.”
RBC spies big potential for the company to expand outside the IT world. “ServiceNow could become the platform for the enterprise as customers and partners write custom SaaS applications for HR, finance, facilities, legal, procurement, etc. on its platform.”
RBC’s Matthew Hedberg (view Hedberg’s TipRanks profile) boosted his price target from $200 to $205 on July 26 following a mixed earnings report that included top- and bottom-line beats, but also light guidance.
Market value: $14.3 billion
TipRanks consensus price target: $126.27 (32% upside potential)
Splunk (SPLK, $96.10) provides a software platform for real-time operational intelligence. More than 9,500 customers around the world use Splunk in multiple ways, from deepening customer understanding to cutting cybersecurity risk and fraud.
“We are bullish on Splunk’s ability to grow and take share in a new market that we call operational intelligence … it’s about gaining actionable insight to make better business decisions by harnessing the full power of data,” RBC writes. Looking toward the future, “We think SPLK is well positioned as a hybrid-cloud data management platform that can leverage massive data-sets and harness machine learning trends better than most.”
In May, the company beat first-quarter profit and revenue estimates and also beat expectations for Q2 guidance. That prompted Matthew Hedberg to reiterate his “Buy” rating with a new $125 price target. Investors will get to see Splunk’s fiscal second-quarter results after the Aug. 23 closing bell.
Note: RBC included five other tech stocks in its report: Alphabet, Apple (AAPL), Synopsis (SNPS), Salesforce.com (CRM) and Visa (V).