Morgan Stanley's 6 Best Tech Stocks To Buy for Long Term Investment

NEW YORK (TheStreet) -- Investors like to bet on tech companies. The potential for market-beating growth is huge -- if you buy the right ones. 

Morgan Stanley (MS) analysts identified "high-quality companies likely to strengthen and extend a sustainable competitive advantage, resulting in a "30 for 2018" list. The analysts put forth their best investment ideas "in their sectors at times of market dislocations or uncertainty." The stocks are considered suitable for holding for a three-year time period, according to the report, issued Thursday.

"Our driving principle was to create a list of companies whose business models and market positions would be increasingly differentiated by 2016," the report said.

Morgan Stanley's top investment ideas for tech industry are names that, for the most part, investors have heard before. But they're worth checking out anyway.

"The main criterion is sustainability -- of competitive advantage, business model, pricing power, cost efficiency, and growth. We selected the companies that scored best on these criteria," the report said. The analysts also took into account capital structure, shareholder remuneration, as well as environmental, social and governance principles, which can "shed light on a management team's approach to sustainable and responsible governance over the very long term."

When you're done be sure to check out the investment bank's consumer sector investment ideas. We paired Morgan Stanley's views with ratings from TheStreet Ratings for comparison.

TheStreet Ratings, TheStreet's proprietary ratings tool, projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.

Buying an S&P 500 stock that TheStreet Ratings rated a "buy" yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a "buy" yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.

Note: Year-to-date returns are based on May 18, 2015 closing prices.

APH Chart APH data by YCharts

1. Amphenol Corp. (APH)
Market Cap: $18 billion
Year-to-date return: 8.1%
Morgan Stanley Rating/Price Target: Equal weight/$58 PT

Morgan Stanley said: We view Amphenol as a premier franchise in the connector space with superior revenue growth and strong track record. Connectors represent a $50 billion market and grow at 2x GDP. More so, the industry is characterized by benign pricing and low capital intensity, leading to attractive FCF and returns. Despite being top-heavy with top 10 companies representing 60% share, the connector market remains fragmented with hundreds of regional companies that operate in niche markets and lack geographical presence or resources to scale. This provides many opportunities for larger companies such as Amphenol to gain share through M&A. Amphenol has more than doubled its market share over the last 10 years to 9% and the combination of strong organic growth and meaningful M&A activity has led to a 13% CAGR over the 2004-14 period, nearly 3x the market's growth rate. Further, the company has entered the larger and faster growing $70 billion sensor market, through its acquisition of GE's Advanced Sensors business. We expect Amphenol to make further acquisitions as well as invest organically in sensors, which should help sustain its above-average growth.

TheStreet Ratings: Buy, A-
TheStreet Ratings said:
"We rate AMPHENOL CORP (APH) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, impressive record of earnings per share growth, notable return on equity, expanding profit margins and solid stock price performance. We feel its strengths outweigh the fact that the company is trading at a premium valuation based on our review of its current price compared to such things as earnings and book value."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • APH's revenue growth has slightly outpaced the industry average of 0.1%. Since the same quarter one year prior, revenues slightly increased by 6.5%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • AMPHENOL CORP has improved earnings per share by 16.3% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, AMPHENOL CORP increased its bottom line by earning $2.22 versus $1.96 in the prior year. This year, the market expects an improvement in earnings ($2.45 versus $2.22).
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Electronic Equipment, Instruments & Components industry and the overall market, AMPHENOL CORP's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • 35.02% is the gross profit margin for AMPHENOL CORP which we consider to be strong. It has increased from the same quarter the previous year. Along with this, the net profit margin of 13.54% is above that of the industry average.
  • APH's debt-to-equity ratio of 0.94 is somewhat low overall, but it is high when compared to the industry average, implying that the management of the debt levels should be evaluated further. Even though the debt-to-equity ratio shows mixed results, the company's quick ratio of 2.64 is very high and demonstrates very strong liquidity.

 

 

 

AVGO Chart AVGO data by YCharts

2. Avago Technologies (AVGO)
Market Cap: $33.4 billion
Year-to-date return: 29.4%
Morgan Stanley Rating/Price Target: Overweight/$154 PT

Morgan Stanley said: Avago is one of the fastest growing companies in the Technology sector, led by 20%-plus growth in its wireless segment (40% of sales). We stress that it is one of the few companies in the smartphone supply chain that is benefiting from an expansion in total available market (TAM), driven by a sharp uptick in radio frequency (RF) content. We see a long runway for growth in premium filters, Avago's stronghold in wireless, driven by 3 factors: (1) Rise in LTE penetration in mobile devices globally from 30% today to 50% by 2017; (2) Continued increase in frequency bands supported by LTE-capable smartphones as devices transition from local to regional/global; (3) A pickup in adoption of carrier aggregation. We expect the premium filter market, dominated by Avago with ~75% market share, to grow at a 36% CAGR from ~$1.6 billion in 2014 to~$4 billion in 2017.

TheStreet Ratings: Buy, A-
TheStreet Ratings said:
"We rate AVAGO TECHNOLOGIES LTD (AVGO) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its robust revenue growth, expanding profit margins, good cash flow from operations, increase in net income and solid stock price performance. We feel its strengths outweigh the fact that the company has had somewhat disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • AVGO's very impressive revenue growth greatly exceeded the industry average of 0.0%. Since the same quarter one year prior, revenues leaped by 133.7%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The gross profit margin for AVAGO TECHNOLOGIES LTD is rather high; currently it is at 61.68%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 21.18% is above that of the industry average.
  • Net operating cash flow has significantly increased by 110.04% to $481.00 million when compared to the same quarter last year. In addition, AVAGO TECHNOLOGIES LTD has also vastly surpassed the industry average cash flow growth rate of 14.84%.
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Semiconductors & Semiconductor Equipment industry. The net income increased by 161.9% when compared to the same quarter one year prior, rising from $134.00 million to $351.00 million.
  • Powered by its strong earnings growth of 130.18% and other important driving factors, this stock has surged by 85.28% over the past year, outperforming the rise in the S&P 500 Index during the same period. Looking ahead, the stock's sharp rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.

 

GOOGL Chart GOOGL data by YCharts

3. Google (GOOGL)
Market Cap: $373 billion
Year-to-date return: 3%
Morgan Stanley Rating/Price Target: Equal weight/$565 PT

Morgan Stanley said: We see investments in opportunities outside of the core search business driving impressive growth on the horizon, and with the imminent arrival of a new CFO, longer-term we believe Google's position as one of the leaders in the technology space is largely unmatched. Our Equal-weight view on the stock on a 12-18 month horizon is based on a balance of GOOGL's undemanding valuation among large-cap growth stocks, offset by a view that the underlying and highly profitable search business is slowing faster than expected.

TheStreet Ratings: Buy, B
TheStreet Ratings said:
"We rate GOOGLE INC (GOOGL) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, reasonable valuation levels, expanding profit margins and good cash flow from operations. We feel its strengths outweigh the fact that the company has had somewhat disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • GOOGL's revenue growth has slightly outpaced the industry average of 5.8%. Since the same quarter one year prior, revenues rose by 11.9%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Although GOOGL's debt-to-equity ratio of 0.05 is very low, it is currently higher than that of the industry average. Along with this, the company maintains a quick ratio of 5.28, which clearly demonstrates the ability to cover short-term cash needs.
  • The gross profit margin for GOOGLE INC is rather high; currently it is at 69.99%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 20.77% is above that of the industry average.
  • Net operating cash flow has significantly increased by 50.69% to $6,617.00 million when compared to the same quarter last year. In addition, GOOGLE INC has also modestly surpassed the industry average cash flow growth rate of 41.37%.

 

 

 

LNKD Chart LNKD data by YCharts

4. LinkedIn (LNKD)
Market Cap: $25 billion
Year-to-date return: -13.6%
Morgan Stanley Rating/Price Target: Overweight/$300 PT

Morgan Stanley said: We believe LinkedIn's monetization is only starting to bloom, as we see Talent Solutions, Marketing Solutions and (in time) Sales Navigator driving material upside and higher overall earnings power. In all, we see LinkedIn growing revenue at a 27% CAGR over four years, driven by 28%-plus growth from Talent Solutions, where we estimate the Corporate Customers runway is larger than many think, and 26% growth from Marketing Solutions, which we view as an underappreciated product that makes LinkedIn "the Facebook for professional/B2B advertising." We see LinkedIn's Sales Navigator product and its targeting of the 5-6 million global professional sales people also starting to contribute.

TheStreet Ratings: Hold, C
TheStreet Ratings said:
"We rate LINKEDIN CORP (LNKD) a HOLD. The primary factors that have impacted our rating are mixed - some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance and good cash flow from operations. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, disappointing return on equity and feeble growth in the company's earnings per share."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 5.8%. Since the same quarter one year prior, revenues rose by 34.8%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Compared to its closing price of one year ago, LNKD's share price has jumped by 33.61%, exceeding the performance of the broader market during that same time frame. Regarding the stock's future course, our hold rating indicates that we do not recommend additional investment in this stock despite its gains in the past year.
  • Despite currently having a low debt-to-equity ratio of 0.32, it is higher than that of the industry average, inferring that management of debt levels may need to be evaluated further. Even though the debt-to-equity ratio shows mixed results, the company's quick ratio of 4.51 is very high and demonstrates very strong liquidity.
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Internet Software & Services industry. The net income has significantly decreased by 216.4% when compared to the same quarter one year ago, falling from -$13.45 million to -$42.55 million.
  • The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. Compared to other companies in the Internet Software & Services industry and the overall market, LINKEDIN CORP's return on equity significantly trails that of both the industry average and the S&P 500.
PANW Chart PANW data by YCharts

5. Palo Alto Networks (PANW)
Market Cap: $13 billion
Year-to-date return: 28.7%
Morgan Stanley Rating/Price Target: Overweight/$158 PT

Morgan Stanley said: Palo Alto Networks offers a disruptive platform built from the ground up to specifically address the evolving security landscape. We are positive on PANW given our view that: (1) Palo Alto Networks is addressing a larger total addressable market (TAM) than we've seen with other security leaders in the past; (2) Palo Alto is an effective fast follower, driving our confidence that Palo Alto will be able to sustain growth in an evolving security market.

As the leading next generation firewall vendor, we believe PANW will sustain over 21% revenue growth through C2020 as it takes share in the $16 billion network and endpoint security market, to reach ~71,000 customers in C2020, still below CheckPoint's and Fortinet's >150K customer bases. Key value drivers for PANW are likely to include new customer wins, higher growth driven by sales investments, increased existing customer penetration, and ramping adoption for additional subscription services.

TheStreet Ratings: Hold, C-
TheStreet Ratings said:
"We rate PALO ALTO NETWORKS INC (PANW) a HOLD. The primary factors that have impacted our rating are mixed -some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance and good cash flow from operations. However, as a counter to these strengths, we find that the company's return on equity has been disappointing."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • PANW's very impressive revenue growth greatly exceeded the industry average of 2.8%. Since the same quarter one year prior, revenues leaped by 54.3%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 155.62% over the past year, a rise that has exceeded that of the S&P 500 Index. Regarding the stock's future course, our hold rating indicates that we do not recommend additional investment in this stock despite its gains in the past year.
  • PANW's debt-to-equity ratio of 0.92 is somewhat low overall, but it is high when compared to the industry average, implying that the management of the debt levels should be evaluated further. Despite the fact that PANW's debt-to-equity ratio is mixed in its results, the company's quick ratio of 1.95 is high and demonstrates strong liquidity.
  • The change in net income from the same quarter one year ago has exceeded that of the S&P 500 and greatly outperformed compared to the Communications Equipment industry average. The net income has decreased by 7.7% when compared to the same quarter one year ago, dropping from -$39.95 million to -$43.01 million.
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Communications Equipment industry and the overall market, PALO ALTO NETWORKS INC's return on equity significantly trails that of both the industry average and the S&P 500.

 

WDAY Chart WDAY data by YCharts

6. Workday Inc. (WDAY)
Market Cap: $17.4 billion
Year-to-date return: 12.6%
Morgan Stanley Rating/Price Target: Equal weight/$102 PT

Morgan Stanley said: We believe Workday is well-positioned to benefit from the shift of IT dollars away from legacy on-premise software towards software-as-a-service (SaaS) applications. The company's early success has been in the $11 billion market for Human Capital Management software, putting Workday on track to exceed $1 billion in revenue this year with ample room for further growth. However, we also see potential for newer product areas like Financials/ERP and Data/Analytics to become meaningful revenue contributors over the coming years, quintupling Workday's addressable market opportunity to over $50 billion and providing a runway for 25%-plus sustained topline growth for the next decade or more.

Two common pushbacks to the Workday story are (1) the slower uptake of SaaS solutions in the ERP market outside of HR; and (2) competition from legacy leaders like Oracle (ORCL) and SAP. While both likely remain overhangs in the near-term, we also expect these concerns to ease in the medium-to-long-term. Workday took a fundamentally different approach when developing its solution, building on a proprietary in-memory database that offers key architectural advantages in analytics and data management. We think these advantages will become increasingly apparent over time as Workday builds out its analytics suite, acting as a catalyst to speed migrations to the cloud in ERP and widening the competitive moat between Workday and peers looking to deliver legacy solutions via a cloud model.

TheStreet Ratings: Sell, D+
TheStreet Ratings said:
"We rate WORKDAY INC (WDAY) a SELL. This is driven by a few notable weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. Among the areas we feel are negative, one of the most important has been an overall disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Current return on equity is lower than its ROE from the same quarter one year prior. This is a clear sign of weakness within the company. Compared to other companies in the Software industry and the overall market, WORKDAY INC's return on equity significantly trails that of both the industry average and the S&P 500.
  • The change in net income from the same quarter one year ago has exceeded that of the S&P 500 and the Software industry average. The net income has decreased by 6.2% when compared to the same quarter one year ago, dropping from -$55.98 million to -$59.47 million.
  • WORKDAY INC reported flat earnings per share in the most recent quarter. The company has reported a trend of declining earnings per share over the past two years. However, the consensus estimate suggests that this trend should reverse in the coming year. During the past fiscal year, WORKDAY INC reported poor results of -$1.35 versus -$1.00 in the prior year. This year, the market expects an improvement in earnings (-$0.22 versus -$1.35).
  • Despite currently having a low debt-to-equity ratio of 0.44, it is higher than that of the industry average, inferring that management of debt levels may need to be evaluated further. Even though the debt-to-equity ratio shows mixed results, the company's quick ratio of 3.19 is very high and demonstrates very strong liquidity.
  • The gross profit margin for WORKDAY INC is currently very high, coming in at 76.39%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of -26.28% is in-line with the industry average.

 

 

 

 

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