TECH STOCK 2020

Tech stocks have been massive wealth creators over the years. Stocks like Apple, Microsoft, and Amazon have generated huge returns. Tech stocks have a high beta, which means they outperform indices in a bull run but are also subject to volatility in a downturn.

We know the yield curve has inverted. The yield curve has been a recessionary indicator for five decades now. The inverted yield curve tends to precede a recession by 12 to 24 months. So investors still have time to play the market, and they can pick tech stocks with significant upside potential. Here we look at three tech stocks trading at attractive valuations. All three should move higher before the next recession annihilates the stock market.

Amazon, a giant among tech stocks

Yes, Amazon (AMZN) is still trading at a cheap valuation despite gaining 454% in the last five years. This tech heavyweight continues to fire on all cylinders. It’s expected to grow sales 19.8% in 2019 and 18.9% in 2020. While earnings per share are expected to grow 17% this year, they should grow by a robust 40.8% in 2021 and at an annual rate of 83% over the next five years.

Compare these numbers to Amazon’s forward PE multiple of 55x. You can see that the stock has significant upside potential. Amazon should continue to gain traction in the highly profitable cloud business. And the company’s eyeing e-commerce expansion in emerging economies. It might very well be the first public company to be valued at $2 trillion.

RBC Capital has increased its 12-month price target on Amazon from $2,600 to $2,250. The investment bank is optimistic about Amazon’s one-day delivery for its Prime members. Over 90% of analysts covering AMZN recommend a “buy.” They have a 12-month average price target of 2,269 for Amazon, which indicates upside potential of 23.7%.

AMZN stock has gained 22% year-to-date. It’s trading at $1,835 per share.

Alibaba, a Chinese monolith

China’s (FXI) Alibaba (BABA) is a stock that has outperformed the broader indices since its IPO. The Alibaba stock has returned over 100% since it was publicly listed in September 2014. After a disappointing 2018, Alibaba has made a strong comeback and gained 30% year-to-date.

While China’s economy is in a slowdown, Alibaba investors will be banking on high growth in e-commerce to drive sales. Alibaba has plenty of growth drivers since China’s middle class will continue to expand—as will the country’s internet users and consumer spending over the next few years. The stock will also get a boost if the trade war comes to an end or if tensions manage to recede, according to this Investor Place report.

Alibaba’s sales are expected to rise 30.4% to $71.38 billion in 2019 and 29.2% to $92.21 billion in 2020. Analysts expect earnings per share to rise 22.2% in 2019 and 25.7% in 2020. Alibaba stock is trading at a forward PE multiple of 20, and we can see that it’s undervalued, given the company’s growth rates.

Currently, 98% of analysts covering Alibaba recommend a “buy.” They have a 12-month average target price target of $222 for the stock, which indicates upside potential of 25%.

Autodesk, another strong bet

Autodesk (ADSK) stock has gained 173% over the last five years. The stock is up 14.3% year-to-date. Despite the impressive returns, ADSK investors have lost 15.5% since July 2019. Autodesk announced its second-quarter results for fiscal 2020 last week. It also reported revenue of $797 million, a rise of 30% year-over-year.

ADSK shares have seen a pullback recently. The company lowered its EPS estimates for 2020. Investors chalked up the revised outlook to trade tensions and macro uncertainty. ADSK stock is trading at a cheap valuation, and it should move higher over the next 12 months.

Autodesk’s sales are expected to rise 26.7% to $3.26 billion in 2020 and 21.8% to $3.96 billion in 2021. Analysts expect earnings per share to rise 173.3% in 2020 and 63% in 2021. Autodesk stock is trading at a forward PE multiple of 32.6x, and you can see that it’s grossly undervalued, given the company’s growth rates.

Currently, 82% of analysts covering Autodesk recommend a “buy.” They have a 12-month average target price target of $174 for the stock, which indicates upside potential of 18.4%.

Tech stocks for rising uncertainty

These tech stocks are a safe bet, given the market uncertainty and rising trade tensions between the US and China. We’ve seen tech stocks rally significantly before a recession only to undergo a massive correction when the economy tanks.

On September 4, cybersecurity company Palo Alto Networks (PANW) reported its fourth-quarter and fiscal 2019 financial results. The company reported Q4 revenues of $805.8 million, a YoY (year-over-year) rise of 22%. This was higher than the consensus estimate by $2.24 million.

PANW also reported non-GAAP EPS (earnings per share) of $1.47, a YoY rise of 9.7%. This is higher than the consensus estimate by $0.05. The company’s GAAP EPS of -$0.22, however, missed the consensus estimate by $0.22.

According to Palo Alto Networks’ fourth-quarter earnings press release, billings represent an important metric for the company, including product revenues and subscription and support revenues. In the fourth quarter, the company reported total billings of $1.06 billion, a YoY rise of 22.5%.

In fiscal 2019, Palo Alto Networks reported revenues of $2.90 billion, a YoY rise of 27.5%. The company reported non-GAAP EPS of $5.45, a YoY rise of 29.8%. The company also reported total billings of $3.49 billion in fiscal 2019, a YoY rise of 22.2%.

Yesterday, Palo Alto Network stock closed at $200.49, 0.68% higher than its previous closing price. The company’s stock is currently trading at $214.95, 7.11% higher than the previous closing price. To learn more about the company’s performance in yesterday’s after-market trading session, please read Why Is PANW Stock Gaining in After-Hours Trading?

Analysts’ recommendations for Palo Alto Networks

The 37 analysts tracking Palo Alto Networks have an average target price of $264.18 on its stock. This indicates a potential upside of 22.1% in the next 12 months based on the current trading price.

Today, BMO Capital Markets and Maxim Group reiterated their “outperform” ratings and set a target price of $245 for the stock. Maxim Group also reiterated its “buy” rating and raised its target price from $304 to $316. On August 20, Bank of America/Merill Lynch reiterated its “buy” rating and raised its target price from $275 to $307.

Market opportunity

According to IndustryARC, the global cybersecurity market was worth $140 billion–$150 billion in 2018. The market is expected to grow at a CAGR (compound average growth rate) of 8% from 2019 to 2025.

According to Palo Alto Networks’ fourth-quarter earnings presentation, the cloud security market is expected to grow at a CAGR of 21.2% from 2018 to 2022. According to Goldman Sachs Global Investment Research, the public cloud disruption opportunity could exceed $850 billion in 2022 and about $1 trillion in 2023. Plus, Palo Alto Networks expects the cloud security market to grow in line with the overall public cloud market.

In its fourth-quarter earnings presentation, the company has estimated the TAM (target addressable market) in enterprise and cloud to be worth $72.6 billion in 2022. This is significantly higher than the company’s TAM of $19.1 billion in 2017.

Palo Alto Networks expects its network security TAM and automation opportunity TAM to be worth $26.5 billion and $14.1 billion, respectively, in 2022. Palo Alto Networks estimated its cloud security TAM and automation opportunity TAM to be worth $7.8 billion and $4.1 billion, respectively, in 2022.

By 2022, Palo Alto Networks expects its endpoint protection, analytics, and automation TAM to be worth $13.1 billion. It expects its automation opportunity TAM to be worth $7.0 billion in 2022.

Market growth rates

Palo Alto Networks forecast a 9.2% CAGR for its overall TAM from 2018 to 2022. The company expects its cloud security TAM and network security TAM to grow respective CAGRs of 21.2% and 6.9% from 2018 to 2022.

The company expects its endpoint protection, analytics, and automation TAM and its Future Security Automation TAM to grow CAGRs of 10.2% and 8.4%, respectively, from 2018 to 2022.

Long-term revenue and billing targets

In its fourth-quarter earnings presentation, Palo Alto Networks guided for fiscal 2020 revenues of $3.4 billion–$3.5 billion and fiscal 2022 revenues of $5.0 billion. This implies a CAGR of 20% from fiscal 2019 to fiscal 2022.

Plus, the company guided for total billings of $4.1 billion–$4.2 billion in fiscal 2020 and around $6.0 billion in fiscal 2022. This implies a CAGR of 20% from fiscal 2019 to fiscal 2022.

According to its fourth-quarter earnings presentation, Palo Alto Networks has focused on positioning the firewall as a platform to integrate and simplify security. The company’s next-generation firewalls offer customers subscriptions for features such as threat prevention, URL filtering, Global–Protect, WildFire, and DNS Security.

The company plans to integrate IoT (Internet-of-Things) security in its firewall platform from 2020 to 2022. Notably, Palo Alto Networks expects its firewall platform billings to rise at CAGR of 23% from 2019 to 2022. This is lower than its CAGR of 27% reported from 2017 to 2019.

Palo Alto Networks’ next-generation security business, comprising its Prisma and Cortex platforms, reported billings of $452 million in fiscal 2019. This accounted for 13% of the company’s total billings.

The company expects next-generation security billings to be worth $800 million–$810 million in fiscal 2020 and $1.75 billion in fiscal 2022. As a result, this implies a CAGR of 57% from fiscal 2019 to fiscal 2022.

The company expects its next-generation security business billings to be around 30% of the company’s billings in fiscal 2022. Plus, PANW guided for next-generation security business revenues of $1.0 billion in fiscal 2022.

Margin and cash flow targets

In its fourth-quarter earnings presentation, Palo Alto Networks set the target for a long-term operating margin of more than 25%. The company has guided for an investment of $100 million–$125 million in its next-generation security business in fiscal 2020. Subsequently, the company expects to report operating margin leverage of 150 basis points each in fiscal 2021 and fiscal 2022.

In fiscal 2019, Palo Alto Networks reported adjusted FCF (free cash flow) of $1.06 billion. The company expects to generate adjusted FCF of around $4.0 billion by fiscal 2022. Plus, the company also set a long-term FCF margin target of more than 30%.

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