Well, you knew it would happen one day. After an incredible multiyear run, Facebook Inc. (NASDAQ: FB) finally got the comeuppance many of the bears have howled about for years. The revenues missed, guidance was very bearish, user data and metrics were bad and shops across Wall Street dramatically slashed their price targets. While most of the damage is done, the uncharacteristic level of the miss will leave many very cautious on the stock going forward.
We decided to look for tech stocks with big upside potential. We screened the Merrill Lynch technology research database and found five that look like solid picks for the rest of 2018 and beyond. All are rated Buy.
Alphabet
The technology giant continues to expand, and while search is still king, the cloud presence is growing fast. Alphabet Inc. (NASDAQ: GOOGL) is a global technology company is focused on key areas, such as search, advertising, operating systems and platforms, enterprise and hardware products. It generates revenue primarily by delivering online advertising and by selling apps and contents on Google Play, as well as hardware products. The company provides its products and services in more than 100 languages and in 190 countries, regions and territories.
Alphabet offers performance and brand advertising services. 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 company blew out earnings numbers, and with a wide and bountiful silo of products and services, the stock remains almost unchallenged. It should be noted that traffic acquisition cost relief drove 20% gross profit growth despite heavy cloud infrastructure and YouTube content investment.
The Merrill Lynch price target for the stock is $1,390, and the Wall Street consensus target is $1,367.96. The shares closed trading Thursday at $1,285.50.
Cisco
This top mega-cap technology company recently reported an outstanding quarter. Cisco Systems Inc. (NASDAQ: CSCO) designs, manufactures and sells internet protocol (IP) based networking products and services related to the communications and information technology industry worldwide.
It provides switching products, including fixed-configuration and modular switches, and storage products that provide connectivity to end users, workstations, IP phones, wireless access points and servers, as well as next-generation network routing products that interconnect public and private wireline and mobile networks for mobile, data, voice and video applications.
Cisco reported a 4.4% rise in quarterly revenue, more than expected by analysts, according to Thomson Reuters, and it was its second straight quarterly rise, driven by strong growth in its newer businesses, such as security. The company’s net income of $2.69 billion, or $0.56 per share, in the fiscal third quarter ended April 28 was higher year over year as well. Toss in a massive $25 billion share buyback plan and investors should be well rewarded going forward. Shareholders also receive a 3.03% dividend.
Merrill Lynch has a $53 target price, and the consensus target was last seen at $49.70. The stock closed Thursday at $43.53 a share.
Microsoft
This top old-school technology stock has posted all-time highs this year and has a massive $132.7 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.
Many 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 its cloud computing platform offering. Some have flagged Azure as a solid rival to Amazon’s AWS service, while others maintain that Microsoft is discounting Azure for large enterprises, such that Azure may be cheaper than AWS for larger users. The cloud was big in the recent earnings report which was outstanding.
Microsoft also is expected to be a winner in the government JEDI cloud project, as the company and its dedicated Azure Government segment appear to be the main challenger to AWS, with industry checks barely mentioning IBM and Google, and countering that Oracle has little traction as a provider of modern cloud infrastructure services to the U.S. federal government.
Shareholders receive a 1.53% dividend. The $130 Merrill Lynch price target compares with the $112.47 consensus price objective and the most recent close at $109.62.
Qualcomm
This company was added to the Merrill Lynch US 1 list in the spring. Qualcomm Inc. (NASDAQ: QCOM) designs, develops and supplies semiconductors and collects royalties on wireless handheld devices and infrastructure based on its dominant position in CDMA and other related technology patents.
In addition, Qualcomm provides systems software and components to wireless handset vendors and promotes applications and services that run on high-speed wireless networks. The company operates primarily through two segments: CDMA Technologies and Technology Licensing.
The company ended up finishing the fiscal second quarter with a positive earnings surprise. The company generated $5.23 billion in revenue, which also topped Wall Street expectations.
The company has had a plethora of headline issues, not the least of which was a proposed buyout by Broadcom that the government put the kibosh on. That is in addition to a failed attempt to acquire NXP Semiconductors. Qualcomm has announced its intention to terminate the NXP deal and pursue $30 billion in share repurchases.
Shareholders receive a 3.9% dividend. Merrill Lynch has a price target of $75. The consensus target is $61.95, and shares closed Thursday at $63.58.
Western Digital
This is a leader in the total addressable hard disk drive (HDD) market. Western Digital Corp. (NASDAQ: WDC) designs, manufactures and markets hard disk drives for use in enterprise storage, servers, desktop and laptop computers and consumer electronic devices. It also has a growing solid state drive and storage systems portfolio and is currently the third largest enterprise solid state drive manufacturer.
The company is responding to changing market needs by providing a full portfolio of compelling, high-quality storage products with effective technology deployment, high efficiency, flexibility and speed. Its products are marketed under the HGST and WD brands to original equipment manufacturers, distributors, resellers, cloud infrastructure providers and consumers.
The analysts feel the company’s business mix switch to NAND flash could provide earnings momentum and growth as compared to the rather flat revenue streams from the HDD product line. In addition, personal computers account for 50% of hard disk drive sales, and the improved performance at Dell and overall PC sales bodes well for the company in 2018 and beyond.
Shareholders receive a 2.01% dividend. Merrill Lynch analysts have a huge $120 price target. The consensus target is $115.73, and shares closed on Thursday at $77.09.
Five companies that have big upside to the Merrill Lynch price targets, and also offer investors perhaps a more comfortable entry point. There is a good chance the market could continue to trade sideways for the balance of 2018, and these could be good vehicles for that sideways move.
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