For the most part, earnings from the big technology companies came in at or above Wall Street expectations. Some clear trends have started to emerge as mega cap tech stocks that focus on the service side, notably International Business Machines Corp. (NYSE: IBM), had very poor third-quarter numbers. The changing trends in tech, and especially in information technology (IT) purchasing patterns, were not lost on the tech analysts at UBS.
In a new research report, the UBS team targeted just six of the top large cap names out of their extensive tech universe to buy going forward. They cited the intense pricing pressure in the service side of the business as a leading reason to stay clear of that area. They also pointed to smartphone and tablet margin competition as a reason for keeping just a Neutral rating on Apple Inc. (NASDAQ: AAPL).
Here are the top six tech stocks to buy at UBS.
Cisco Systems Inc. (NASDAQ: CSCO) is the networking leader and may be poised to have a monster 2014. In addition, the company has been looking to protect its core business from new competition. Cisco recently bought out the remainder of its majority-owned data center technology start up called Insieme, in a deal that could cost up to $863 million. Investors are paid a 2.9% dividend. The UBS price target for the stock is $28.50. The Thomson/First Call estimate is at $27.75. Cisco closed Friday at $23.51.
EMC Corp. (NYSE: EMC) dominates large-scale storage, and its large ownership interest in cloud software provider VMware Inc. (NYSE: VMW) is an added benefit for investors. The company’s $6 billion buyback for the three years to December 2015 is on schedule, with approximately $3.5 billion remaining. Management stated its long-term intention to return about 50% of free cash flow to shareholders, with half from buybacks and half from dividends. Despite recent weakness in infrastructure, EMC has been able to grow revenue by a 10% compound annual rate over the past five years and has increased free cash flow by an annualized 18% over the period. Investors are paid a 1.7% dividend. UBS has a $30 price target, the same as the consensus target. EMC closed Friday at $23.95.
Google Inc. (NASDAQ: GOOG) remains the 900-pound gorilla in the technology space. With everything from a dominate search platform to the Android operating system and to YouTube, Google continues to lead the industry. In addition, the company has a mountain of cash, which at almost $55 billion provides ample room for innovation and acquisitions. The UBS price target for the stock is $1,100, which is also the consensus target. Google closed last Friday at $1016.03.
Microsoft Corp. (NASDAQ: MSFT) will soon head in to uncharted waters when it appoints a new chief executive who is not from within the company. The leading candidate, and a Wall Street favorite, is current Ford Motor Co. (NYSE: F) CEO Alan Mulally. With the Xbox One poised to be released this month, the fourth quarter sales for the company may be outstanding. Investors are paid a very solid 3.2% dividend. The UBS price target for the software giant is $40, though the consensus target is lower at $35. Microsoft closed Friday at $37.78.
Oracle Corp. (NYSE: ORCL) has sputtered, giving investors a prime entry point. The technology giant is making a push into cloud computing, application virtualization and software-defined networking. Application virtualization and software-defined networking should be key areas of revenue growth going forward. Shareholders are paid a 1.4% dividend. UBS has set a $37 price target on the stock. The consensus is at $36.50, and Oracle closed Friday at $34.35.
Qualcomm Inc. (NASDAQ: QCOM) is the final large cap tech name to buy at UBS. Qualcomm’s yearly sales have more than doubled since 2010. The company gets the majority of its revenue from processors and modem chips used in phones. The bulk of its profit comes from licensing patents that cover many of the fundamentals of modern phone networks. As the wireless revolution continues, earnings growth should follow. Shareholders are paid a 2% dividend. UBS has a $74 price objective on the stock. The consensus target is $75. Qualcomm close Friday at $67.45.
The fact that the service side of the business is seeing lower margins is not surprising. With three major companies all competing for the same dollar, pricing is weakened by the competition. The top UBS names to buy all but dominate their various arenas. They should continue to for years to come.