It happens every 10 years or so and has since the early 1990s. A breakthrough technology comes to the marketplace and, as usual, the biggest players in the industry often end up the leaders in the new space. Apple Inc. (NASDAQ: AAPL) did it in 2007 when it announced the first iPhone. The replacement of flip-type cell phones with smartphones was radical, and it pushed out many of the biggest players.
The huge leap forward in technology is what Merrill Lynch has termed the fourth revolution in technology, which the firm believes is the next “form factor” for the gigantic Internet of Things world. In a very deep and complete set of research reports, analyst Beijia Ma charts the virtual reality (VR), augmented reality (AR) and mixed reality (MR) arenas and cross references the firm’s stock universe picks that have exposure to this huge growth area.
We then screened for the stocks with the highest exposure to the VR/AR/MR world that are rated Buy at Merrill Lynch. Four companies make the grade and could be huge long-term winners in the space.
Alphabet
The search giant continues to expand and is even working on a driverless car now. Alphabet Inc. (NASDAQ: GOOGL) provides online advertising services in the United States, the United Kingdom and rest of the world. It offers performance and brand advertising services, and it operates through Google and Other Bets segments. The Google segment includes principal internet products, such as Search, Ads, Commerce, Maps, YouTube, Apps, Cloud, Android, Chrome and Google Play, as well as technical infrastructure and newer efforts, such as virtual reality.
The Google segment also sells hardware products, comprising Chromecast, Chromebooks and Nexus. The Other Bets segment includes businesses such as Access/Google Fiber, Calico, Nest, Verily, GV, Google Capital, X and other initiatives.
Merrill Lynch points out that the company will be very involved in content distribution for VR and cites 25 million plus installation of compatible apps from the company’s Play Store. It also notes Alphabet’s investment in Magic Leap, which is a U.S. startup company that is working on a head-mounted virtual retinal display that superimposes 3D computer-generated imagery over real world objects by projecting a digital light field into the user’s eye. Also mentioned is Tango, an AR app for smartphones and Daydream a VR platform expected in the fall.
The Merrill Lynch price target for the stock is $960, and the Wall Street consensus target is $940.91. The shares closed Wednesday at $807.99.
The huge social media leader posted gigantic quarterly numbers that truly blew most of Wall Street away. Facebook Inc. (NASDAQ: FB) operates as a mobile application and website that enables people to connect, share, discover and communicate each other on mobile devices and personal computers worldwide.
Its solutions also include Instagram, a mobile application that enables people to take photos or videos, customize them with filter effects, and share them with friends and followers in a photo feed or send them directly to friends; Messenger, a messaging application for mobile and web on various platforms and devices, which enable people to reach others instantly, as well as enable businesses to engage with customers; and WhatsApp Messenger, a mobile messaging application.
Facebook also develops Oculus VR technology and content platform, which allows people to enter an immersive and interactive environment to play games, consume content and connect with others. The Oculus Rift VR headset launched in March and currently has 30 available games on Facebook.
As of late July the company had a stunning 1.13 billion daily active users (DAUs), of which 1.03 billion accessed from a mobile device. Most Wall Street analysts point to the fact that Facebook remains the top beneficiary of the adoption of mobile internet trends with total U.S. internet time spent on Facebook and Messenger.
The $150 Merrill Lynch price target is less than the consensus target of $153.95. The shares closed Wednesday at $131.05.
Microsoft
This top old-school technology stock gives investors a degree of mega-cap tech safety and has a massive $113 billion sitting on the balance sheet. Microsoft Inc. (NASDAQ: MSFT) continues to find an increasing amount of support from portfolio managers, who have added the software giant to their holdings at an increasingly faster pace all of this year and last.
Numerous Wall Street analysts feel that Microsoft has become a clear number two in the public or hyper-scale cloud infrastructure market with Azure, which is the company’s cloud computing platform offering. Some have flagged Azure as a solid rival to Amazon’s AWS service. Analysts also maintain that Microsoft is discounting Azure for large enterprises, such that Azure may be cheaper than AWS for larger users.
The top analysts believe the company continues to make steady progress with its cloud transition and expect Office 365 and Azure to be solid contributors to top and bottom line for the next several years. While not likely to snag the top slot from Amazon, it could add huge incremental revenue for years to come, especially when you factor in the huge revenue potential from the banks, insurance companies and the financial services industry.
Highlighted in the report is the company’s xBox Kinect sensor for interactive gaming; HoloLens, which is a self-contained head-mounted device; and a new VR gaming console dubbed Project Scorpio. The company also recently announced a joint venture with Intel in which Windows 10 will enable regular PC users to run Holographic Shell, which is the same platform as HoloLens.
Microsoft investors receive a 2.5% dividend, and the forward valuation remains compelling. Merrill Lynch has a $65 price target, and the consensus target is $59.65. The stock closed Wednesday at $57.66.
NVIDIA
This is a top chip stock that has reported strong earnings this year, and posted through the roof second-quarter numbers earlier this month. NVIDIA Corp. (NASDAQ: NVDA) is one of the leaders when it comes to supplying graphics processing technology for the 3D graphics market, including desktop graphics processors and gaming consoles.
NVIDIA is also moving into visual computing chips for cars, mobile devices and supercomputers. The company has a technology partnership with electric car maker Tesla Motors. It has been able to use its ability to leverage past investments, with a more controlled spending structure ahead on unified, which enables strong cash flow that is allowing a focus on capital return, which is currently estimated to be $1 billion next year.
Top Wall Street analysts feel the stock is maturing to a platform company from a pure chip company, and Jefferies sees the stock continuing to benefit from four secular trends: VR, PC gaming, chips in the automobile industry and graphic processing units in the cloud.
In the research report, Merrill Lynch cites the company’s GTX1080 chip, which is based on Pascal architecture to handle the huge computing demands of VR. Also mentioned is VRWork which is a comprehensive suite of APIs, libraries and engines that enable application and headset developers to create amazing VR experiences. VRWorks enables a new level of presence by bringing physically realistic visuals, sound, touch interactions and simulated environments to VR. HTC and the Oculus headsets have added support for VRWorks.
The Merrill Lynch price objective is $72. The consensus target is $64.72. The shares closed most recently at $62.19.
These four incredible tech companies all have high participation rates in the coming virtual, augmented and mixed reality landslide. They all have outstanding franchises, and adding in this huge growth driver makes them all even more valuable to shareholders.
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