To put it bluntly, Morgan Stanley isn’t too bullish on the outlook for the tech sector this year. That’s despite the fact that the sector is performing relatively well right now, following the major selloff at the end of 2018. If we look at the Technology Select Sector SPDR Fund (XLK) it’s up 15% year-to-date- versus just 12% for the market. However, Morgan Stanley warns that once the current rally’s momentum comes to an end, tech stocks could bear the brunt.
Morgan Stanley’s Michael Wilson makes a number of key points. First tech firms’ capital spending has dropped dramatically to 6.5% from 24.5% in 1Q18. Second aggregate tech earnings are set to fall by 1.8% this year. That’s on top of historically high valuations for tech stocks (relative to other sectors) and ongoing concerns about China and data privacy regulations.
Nonetheless, the firm doesn’t just discount the whole sector. There are still tech stocks worth buying into. And to demonstrate this, Morgan Stanley has highlighted a few top stock ideas that it believes are primed to outperform. These are stocks that rank highly on Morgan Stanley quantitative model and are rated Overweight by their analysts. Here we take a closer look at five of these tech picks:
Apple (AAPL– Research Report)
Although Morgan Stanley analyst Katy Huberty (Track Record & Ratings) has just lowered her AAPL estimates, she is sticking to her bullish call on the iPhone maker. The analyst cut her March quarter revenue estimate for Apple by 7%, and her FY19 revenue view by 1.4%, following Apple’s Q1 earnings report.
However, Huberty also told investors that the report also provided plenty to smile about. Most notably, non-iPhone revenue soared 19%. Other highlights include increasing revenue outside of China, and signs of sustained Services growth. That’s thanks to the company’s newly disclosed iPhone installed base and Services subscriber metrics.
“Importantly, Apple made investors feel better about several recent debates – 1) weaker iPhone demand, 2) gross margin risk, and 3) Services growth deceleration” says the analyst.
As a result she reiterated her buy rating with a $197 price target (13% upside potential). Overall Apple currently holds a Moderate Buy Street consensus, with a $177 average analyst price target. See what other Top Analysts are saying about AAPL.
Microsoft (MSFT– Research Report)
Top-rated Morgan Stanley analyst Keith Weiss (Track Record & Ratings) sees 25% upside potential ahead for Microsoft. What prompts this bullish call? Weiss reveals that new disclosures from recent results, SEC filings and conversations with the company have boosted his conviction in Microsoft’s forecasts.
Describing the recent quarterly results as “strong where it matters”, Weiss notes that shares are only up 11% year-to-date. He calls this a buying opportunity.
As the IT conversation shifts from pure Public Cloud towards Hybrid Cloud architectures, Weiss believes Microsoft can pull “ahead as the best secularly positioned firm in tech.” Combined with consistent growth, this gives MSFT the “best risk/reward in software” right now.
“With improvement in gross margins, continued (operating expense) discipline and strong capital return, we see a durable teens total return profile at MSFT,” the analyst wrote. He reiterated his buy rating with a $140 price target on February 21. This ‘Strong Buy’ stock has 20 out of 22 analysts currently onside. See what other Top Analysts are saying about MSFT.
Mastercard (MA– Research Report)
Mastercard is on fire. Strong consumer spending saw the company post yet another record quarter. And shares are now popping 19% year-to-date.
“After preparing themselves for conservative commentary and three-year targets given FX and crossborder headwinds, we think investors should be very encouraged by MA management’s commentary, especially as it is becoming clear that the company can find new ways to deliver value to merchants, consumers and bank partners with services, etc.,” Morgan Stanley analyst James Faucette (Track Record & Ratings) wrote.
Faucette’s buy rating on MA comes with a $229 price target. That’s slightly lower than the $240 average price target from the Street. See what other Top Analysts are saying about MA.
PayPal (PYPL– Research Report)
Also on the analyst’s wish-list is payment site PayPal. Faucette told investors not to be concerned about rival digital wallets from Amazon (AMZN), Apple (AAPL). The speculation that such wallets are closing the acceptance gap is “flatly wrong” says Faucette.
In fact, since March 2016, PayPal has had the fastest acceptance growth among all digital wallets, Faucette tells investors. “PYPL’s merchant acceptance lead continues to widen, as PYPL adds another 8 US top 500 internet retailers (net), while Amazon loses 4 merchants and Bitcoin sees no change,” the analyst said.
“Despite increased consumer awareness of Bitcoin, we have not seen any notable progress in Bitcoin’s ability to challenge Visa, Mastercard, PayPal et al. in online acceptance.” That means PayPal is at 82% of top retailers, according to Faucette, while Amazon Pay is accepted at just 4% of non-Amazon retailers.
This drives the upbeat conclusion-: “We think its acceptance lead vs. other digital wallets and consumers’ shift toward online purchases should support PYPL’s TPV [total payment volume] growth at or above the rate of eCommerce.” Faucette also notched his PayPal price target up $2 to $99. Again that’s actually slightly more conservative than the Street’s $103 target. See what other Top Analysts are saying about PYPL.
Genpact (G– Research Report)
Last but not least comes Genpact. The company is a global professional services firm that offers Business Process Outsourcing (BPO) and IT services.
Back in January, Morgan Stanley’s Gaurav Rateria (Track Record & Ratings) upgraded G from Hold to Buy. He now has a $28.50 price target on the stock. Interestingly, Cantor Fitzgerald’s Joseph Foresi (Track Record & Ratings) has also just published a buy rating on Genpact, with a $36 price target.
This is worth noting as Foresi is currently the #2 analyst out of over 5,200 tracked by TipRanks. He writes “We remain optimistic about the company due to the healthy demand backdrop for BPO and the increased client activity brought about by digital engagements.”
Management noted a strong pipeline, says Foresi, reaching the highest levels in the company’s history. And looking forward, global client growth is expected to improve and GE to accelerate.
He concludes: “In our opinion, Genpact deserves a multiple above the peer group average, as margins are expanding and Global Client BPO revenues are still showing solid growth.” Overall, 6 out of 8 analysts currently show a bullish take on the stock- supporting its ‘Strong Buy’ consensus. See what other Top Analysts are saying about G.
Enjoy the Research Report on the Stocks in this Article:
Apple Inc (AAPL) Research Report
Genpact Limited (G) Research Report
Mastercard (MA) Research Report
Microsoft (MSFT) Research Report
So we have looked at Morgan Stanley’s top tech picks. But TipRanks covers thousands of analysts- and all their latest ratings. Looking for fresh investing inspiration? The Analysts’ Top Stocks tool reveals which ‘Strong Buy’ stocks analysts have a very bullish consensus on right now. You can also screen the results according to your own investing strategy. Go to the Analysts’ Top Stocks Tool now.
