Back in the halcyon technology boom of the late 1990s, the large cap tech stocks that dominate the Nasdaq stock market were all the rage among investors. Personal computer use was skyrocketing, laptops were becoming a must-have product, processing power seemed to increase every year. Dot-com stocks began to show up everywhere and financials became irrelevant, the only needed metric was eyeballs. The Nasdaq soared to 5,000. Then the bubble burst.
While the Dow Jones Industrial Average and the S&P 500 have hit new highs, the once-dominant Nasdaq is a long way from 5,000. However, new research from UBS A.G. (NYSE: UBS) suggests that large cap tech may become a new market leader.
In numerous reports out today, the tech analysts at UBS stress new opportunities at the leading large cap tech companies. As we have reported at length, the advent of smartphones and tablets, and the ability for consumers to access data and content anywhere and anytime, have created new channels of growth that large companies are exploiting.
Storage leader EMC Corp. (NYSE: EMC) has taken its majority holdings in VMware Inc. (NYSE: VMW) to parlay a hardware-software relationship that is a model for the tech industry. Yesterday EMC and VMware held their 2013 Strategic Forum for Institutional Investors. VMware sees 2014 to 2016 revenue growth of 15% to 20%, versus a 2014 growth estimate of 15%. VMware sees non-GAAP operating margin improving to 32.5% to 33.5%. EMC reiterated previous raised guidance. With acquisitions, analysts believe EMC can grow at a 11% to 12% compound annual growth rate over the next five years. Additionally, operating leverage and gross margin expansion from mix (software) may drive earnings growth of 12% to 18%. The UBS price target for EMC is $28.50. The Thomson/First Call estimate is $30 on the stock.
The EMC and VMware spun off The Pivotal Group to form a new Web-focused software company that could eventually go public, illustrating both companies’ push to help manage more online information will also help drive earnings. The UBS price target for VMware is $115. The Wall St. consensus price target is $100.
UBS also thinks Oracle Corp. (NASDAQ: ORCL) is a stock to buy now for 2013 gains. UBS cited expanding product sales and easy comparisons to last year, and the software giant has evolved into a large cap value play with a large recurring revenue base. The UBS price target is $30. The consensus is right in line at $38.
The UBS analysts also point to a positive corporate spending tone for 2013 that may bode well for Microsoft Corp. (NASDAQ: MSFT), International Business Machines Corp. (NYSE: IBM), Cisco Systems Inc. (NASDAQ: CSCO), Intel Corp. (NASDAQ: INTC) and even personal computer laggard Hewlett-Packard Co. (NYSE: HPQ).
For investors looking to invest in a stock market that is hitting new all-time highs seemingly every day, one important point to take into consideration is relative value. Large cap technology stocks have underperformed the broader market in the rally that started in 2009. They are cash rich and have consistent business models that allow for growth. This can lead to solid gains as the bull market rolls on.