O’Neil Methodology
• The stock is consolidating along its 50-DMA and we advise adding to positions as it breaks through ¥50,000. Global markets came under selling pressure just after Nintendo reported better-than-expected Q3 FY 2018 results on February 1. The stock pulled back and bounced constructively off its 100-DMA.
• Since the launch of the Switch in March 2017, quarterly sales and adjusted EPS are growing by greater than double digits. The stock remains under accumulation, with its RS line at 52-week highs (outperforming index) and a positive A/D Rating of B-.
• Given the success of the Switch, we believe the stock price will test all-time highs of ¥73,200 (~+51%) over the long term.
Author: Cornelio Ash
Cornelio Ash is a senior equity analyst and member of the U.S. Focus List and the Global Focus List Committees, which approves all equity recommendations for developed, emerging, and frontier markets. He is also a lead for the Technology sector and specializes in the Americas region. Cornelio joined the firm in 2005 and received his B.A. in Finance from California State University, Northridge. He holds a Series 65 securities license.
Global Technology Sector
Americas
Software: Median Q4 2017 revenue and EPS growth estimates of 14% and 11%, respectively, both above expected growth for the Technology sector (8%/9%) and S&P 500 (6%/9%). Sub-industries driving growth include big data, gaming, hyper-convergence, and enterprise. Top picks include Splunk (
), Activision (
), Red Hat (
), and Mindbody (
).
Hardware: Expect growth to moderate in 2018 after a strong 2016–2017. We believe that taking a more selective approach is prudent. Top picks include Applied Materials (
), Cypress Semiconductor (
), Marvell Semiconductor (
), Nvidia (
),
Semiconductor (
), and Universal Display (
).
EMEA
Software: Although growth ideas are limited across Europe, keep an eye on Compugroup Medical (COPX.DE), which has a first-mover advantage in an industry that has been impacted by massive regulatory change.
Hardware: European equities in the overall Technology sector continue to show strong momentum. Europe-based semiconductor companies on our Focus List are: ASML Holding (ASML.NL; ASML:NA; ADR: ASML) and AMS (AMS.CH; AMS:SW). Other stocks of interest include Nordic Semiconductor (NOD.NO; NOD:NO), Infineon Technologies (IFXX.DE; IFX:GR), and STMicroelectronics (STM:FR; STM:FP; ADR: STM).
APAC
Software: Stand out picks include Vakrangee (VKS.IN) and Tencent (TCNT.HK), however our top pick is Nintendo (NNDO.JP). We believe the Nintendo Switch has a chance to replicate the success of the Wii.
Hardware: the outlook for the semiconductor industry is mixed across Asia. Due to concerns regarding softening demand for smartphones, high profile stocks like Sunny Optical (SOPT.HK; 2382:HK), Largan Precision (LPC.TW; 3008:TT), and LG Innotek (LGO.KR; 011070:KS) were removed from our Focus List. We also recommend trimming exposure to tech heavyweight Samsung Electronics (SGL.KR; 005930:KS). Top Picks: NextDC (NXT.AU; NXT:AU), Tokyo Electron (RG@N.JP; 8035:JP), Accton Technology (ACC.TW; 2345:TT), Taiwan Semiconductor Manufacturing (TSM.TW; 2330:TT; ADR: TSM), and Parade Technologies (PDE.TW; 4966:TT).
Gaming
We maintain a bullish outlook on large video game developers ahead of earning season. Top picks include Activision (ATVI), Nintendo (NNDO.JP), and Take-Two (TTWO).
Digital/Downloads account from more than half of total revenue for the top game developers, with ATVI leading at 81%.
The competitive gaming market, otherwise known as e-sports, is growing at a 35% CAGR (2015-2020) and is expected to double over the next three years.
Global Technology Sector
Software
Strong Outlook for Enterprise Cloud
Following strength in Q1 and Q2, growth across cloud companies has persisted as fundamental trends remains intact halfway through Q3 earnings season. We continue to see accelerated adoption of cloud services across major industries (HCM, ERP, CRM) and impressive earnings reports/outlook from bellwethers MSFT. Despite significant price appreciation YTD, cloud-related names are not expensive. Currently, S&P 500 software companies trade at 6x (median) 2018 sales, while KPIs (e.g., recurring revenue, retention rates, etc.) support the secular shift from legacy/on-premises software to the cloud. Standout ideas from our Global Focus List include:
• ServiceNow is ahead of its long-term goal of penetrating 50% of the Global 2000 constituents by 2020. Achieving this long-term goal would
translate into revenues of $4B (four-year CAGR of 31%) and operating margin expansion from 16% to ~30%. On October 25, reported better-than-expected Q3 results and that it had 41% (815) of the Global 2000 as customers. The stock is trending along it 21-DMA.
• Adobe Systems reports on December 14, but it raised its FY18 guidance above consensus expectations after its recent Analyst Day. The catalyst behind the strong guidance was due in part to a price increase for Creative Cloud products (60% of revenue) and expansion of its TAM to more than $83B by 2020. In FY18 sees revenue and adjusted growth of 21% and 30%, respectively, as annualized recurring revenue (ARR) for Digital Media increases to +$1B. It is very difficult to find this level of growth among bellwethers. The stock gapped up on the announcement and is poised to trend higher.
• Autodesk is the market leader for computer aided design (CAD) with more than 30% market share in the global architecture engineering and construction (AEC) industry. in the middle of a transition from a license to SaaS model that is reminiscent of 2013 transition. Due to acceleration in its ARR over the last six quarters (+80%),should achieve revenue of $3.2B, EPS of $3, and FCF of more than $1B by 2020. The stock is due to report results by the end of the month; however, it is currently breaking out from a consolidation and remains buyable.
Global Technology Sector
Offers the world’s leading institutional investment managers a distinct blend of quantitative, fundamental, and technical expertise in global stock buy-and-sell recommendations. Its core method profiles stocks displaying the characteristics of out performance proven persistent over market history—drawn from the firm’s industry leading database.
William O’Neil + Co., Incorporated is a Registered Investment Advisor with the State of California and certain other states. The firm and its affiliates may now or in the future have positions in the securities mentioned in this or other publications. Charts are intended to be used as tools to assist institutional investors in identifying equity ideas worthy for further review. Charts provide certain current and historical information, but are not a substitute for comprehensive analysis of the individual stocks. For further information about our business and legal policies, please see williamoneil.com/legal.
Global Technology Sector
Our Technology Global Financial Sector Report includes an in-depth look at the technology sector in the U.S., EMEA, and APAC markets as well as actionable technology stock picks curated by our research team using the O’Neil Methodology. Some highlights from the report: Despite the recent technical pullback in U.S. software-related names, consolidation remains constructive while the fundamental outlook for high-quality ideas remains strong. In the global hardware industry, the outlook for semiconductor equipment, manufacturing, display, and memory is positive for the remainder of 2017. As long as leading technology stocks continue to act well and the uptrend in the general market remains intact, we would continue to selectively build long positions as entry points present themselves.
