- Bank of America says a select group of smaller technology companies could thrive in spite of both a pandemic and rising US-China trade tensions.
- While the biggest tech companies are dominating the market to an unprecedented degree, Bank of America says there are smaller firms that may have greater upside.
- Strategist Jill Carey Hall's team applied those ideas to a wide range of companies in areas including software, hardware, and manufacturing.
- Visit Business Insider's homepage for more stories.
After a decade of stock market dominance leading up to this winter's crash, giant technology companies are back in the lead.
But any investor who looks at Amazon's 30% gain this year, or Microsoft's 15% increase, likely wonders if that kind of leadership is sustainable. Bank of America is happy to inform them that there are other options — even within the tech sphere.
A team at the firm led by Jill Carey Hall — the firm's head of US small- and mid-cap strategy — just released a guide to tech investing. It identifies two major themes for stock picking in the sector. One, of course, is the coronavirus pandemic and its aftermath. The other is US-China trade tensions, which are suddenly a front-burner issue again.
While recessions and periods of economic weakness are usually bad news for small cap tech companies, Carey Hall's group says those two themes help identify some companies that will benefit from the ways the world is changing.
"While COVID has slowed overall demand, it has also benefitted parts of Internet (streaming, social medial, e-commerce), Software (e-commerce, unified communications, employee mass notification, cloud-based applications), Semis (Compute) and demand for select Hardware products amid work-from home/telehealth/increased supply chain focus," she wrote.
Meanwhile, the combination of the pandemic and the trade dispute will push more companies to move their plants out of China. That could help some US chipmakers and designers and companies that have the manufacturing capacity to help global companies relocate.
They've taken a comprehensive look at the small- and mid-size companies they follow to show investors some of the most promising stocks in software, chips, hardware, and services, resulting in this list of 13.
1. Inphi
Ticker: IPHI
Market cap: $6.2 billion
Industry: Information technology/Semiconductors
Price target: $130
Quote: "Inphi is highly levered to 5G/Data center trends (Telecom/Data center 90%+ of sales), benefiting from a differentiated product portfolio in high demand by top US cloud/5G infrastructure vendors."
Source: BofA Global Research
2. Jabil
Ticker: JBL
Market cap: $4.6 billion
Industry: Information technology/Electronic equipment, instruments and components
Price target: $37
Quote: "JBL has ~50% of its manufacturing outside China with a significant presence in Taiwan and Malaysia (mostly to support Apple, which is a 22% customer). It also has a presence in India, Indonesia and can benefit from near-term moves from China to parts of South East Asia."
Source: BofA Global Research
3. Flex
Ticker: FLEX
Market cap: $5.1 billion
Industry: Electronic equipment, instruments and components
Price target: $13
Quote: "We would highlight JBL and FLEX as Electronics Manufacturing Services companies that have a global manufacturing footprint and significant white space available outside of China to support OEMs who wish to move their manufacturing."
Source: BofA Global Research
4. CDW
Ticker: CDW
Market cap: $15.8 billion
Industry: Electronic equipment, instruments and components
Price target: $125
Quote: "A beneficiary of WFH, telemedicine and distance learning. CDW, one of the largest US-based technology Value Added Resellers (VAR) and system integrators helps organizations in the US/Canada/the UK assess, implement and adopt such solutions."
Source: BofA Global Research
5. Synnex
Ticker: SNX
Market cap: $5.8 billion
Industry: Electronic equipment, instruments and components
Price target: $140
Quote: "20% of SNX's revenues and ~50% of its operating profit come from its Concentrix Business Process Outsourcing (BPO/Call Center) business. Even in this slower macroeconomic period, call volumes into call centers have remained very high."
Source: BofA Global Research
6. Western Digital
Ticker: WDC
Market cap: $13.8 billion
Industry: Technology hardware, storage, and peripherals
Price target: $61
Quote: "WDC has a strong position in the digital economy where expectations are for data generation to continue as more businesses move to the cloud. ... WDC, which is a leading vendor of hard disk drives, benefits from increased storage use."
Source: BofA Global Research
7. Avalara
Ticker: AVLR
Market cap: $7.8 billion
Industry: Software
Price target: $120
Quote: "AVLR is likely to continue gaining share of the $10 billion sales/indirect tax market ... AVLR accounting partners cite expectations for strong, sustained adoption of AVLR's leading sale tax offering for the next several years."
Source: BofA Global Research
8. Coupa Software
Ticker: COUP
Market cap: $14 billion
Industry: Software
Price target: $235
Quote: "Coupa is well positioned in our view to continue generating 35%+ revenue growth while gaining market share in the $15 billion spend management apps market, with opportunities to grow in the yet nascent B2B payments market."
Source: BofA Global Research
9. Proofpoint
Ticker: PFPT
Market cap: $6.4 billion
Industry: Software
Price target: $140
Quote: "Proofpoint is the leader in the healthy and stable Email Security market. The vendor dominates with larger enterprises where spending will likely remain relatively resilient during COVID-related macro pressures."
Source: BofA Global Research
10. Match Group
Ticker: MTCH
Market cap: $6.5 billion
Industry: Interactive media and services
Price target: $100
Quote: "We are positive on Match's commentary on trends seen during the COVID-19 outbreak and accompanying lockdowns, suggesting increasing user activity across the board but in particular among women."
Source: BofA Global Research
11. Wix.com
Ticker: WIX
Market cap: $10.1 billion
Industry: IT services
Price target: $250
Quote: "Our top SMID cap pick for 2020, WIX saw a surge in demand exiting 1Q, which continued into April, as small/mid-sized businesses took advantage of its web site design and presence tools to cope with stay-home orders. ... We see Wix's surging demand as a leap forward in penetration."
Source: BofA Global Research
12. Carvana
Ticker: CVNA
Market cap: $6.4 billion
Industry: Specialty retail
Price target: $100
Quote: "We are challenged to find another company in our coverage universe with as large of a market opportunity ahead of it ... We see CVNA as a beneficiary of the likely post-COVID "new normal" as more consumers may shift to a digital car shopping experience."
Source: BofA Global Research
13. Chewy
Ticker: CHWY
Market cap: $3.5 billion
Industry: Internet and direct marketing retail
Price target: $47
Quote: "We now expect reduced customer acquisition costs in 1H amid higher organic traffic and less competition for marketing spots. ... We continue to like CHWY's subscription-focused business model and see ongoing outperformance."
Source: BofA Global Research
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