Now that we are into the New Year, the stock market and its key sectors warrant introspection. Amid macroeconomic uncertainties and global market upheavals, the sector that stood out in 2014 was Technology. This is evident from a substantially better performance by the NASDAQ-100 Technology Sector (NDXT) index, which rallied 20.3% on a yearly basis, exceeding Dow Jones (6.8%), Nasdaq (6.6%) and the S&P 500 (10.3%).
In addition, the global MSCI World Information Technology Index rose around 17% year-to-date and many of the companies listed under it outperformed the index. However, during the same time period, there were some premier companies that performed below expectations, IBM Corp. (IBM) being one of them.
Of late, the company has been hampered by a persistent slump in demand for its hardware. Also, with its software segment exhibiting slower-than expected sales growth, the company appears to be in dire straits, missing on both revenue as well as EPS estimates in the third quarter of fiscal 2014.
Recent Developments
One of the revolutionary changes that took place in the recent times in the technology space was the emergence of cloud computing. Cloud-computing refers to a technology which helps in accessing information seamlessly across multiple devices from anywhere in the world through web.
Per market research firm IDC, Platform-as-a-service (PaaS), Software-as-a-service (SaaS) and Infrastructure-as-a-service (IaaS), all of which form an integral part of cloud-based offerings, will remain a hotbed of activity in 2015, with $118 billion in spending worldwide.
Some Cloud Companies to Watch in 2015
It appears that several cloud-service providers have gained significant momentum and caught investors’ attention with returns considerably higher than that of IBM. We picked three such stocks that stood out in terms of market returns and performance in 2014. Also, the fundamentals and favorable Zacks Rank of these stocks signal that they are well-poised for 2015.
Headquartered in Hopkinton, EMC Corp. (EMC) offers a lucrative investment option for 2015. EMC gained 12.7% yearly, in 2014, far exceeding the industry majors. Currently, the stock has a Zacks Rank #2 (Buy).
We believe that the recent acquisitions of Spanning Cloud Apps Inc., Maginatics and Cloudscaling Group Inc. will definitely bolster its cloud-based offerings going forward.
Further, it has been quite some time now that EMC has been under pressure from activist investor Elliot Management Corp. to initiate a tax-free spinoff of its 80% stake in VMware (VMW). VMware contributed $23.2 billion of EMC’s revenues in fiscal 2013. Elliot Management has further suggested that the upside to such a spinoff will exceed 40%. We believe that this will continue doing wonders for the share price of EMC.
EMC expects to repurchase shares worth $3 billion in 2014 in a bid to improve its bottom line. Currently, the dividend yield of the company is 1.9%, which is pretty good by normal standard.
Headquartered in Boise, Idaho, Micron Technology Inc. (MU) offers a lucrative investment option with its shares surging 34.5% yearly in 2014. The Zacks Consensus Estimate reflects year-over-year increase of 15.9% for earnings in fiscal 2015. Currently, the stock has a Zacks Rank #3 (Hold).
Going forward, the acquisitions of Elpida and Rexchip (now known as Micron Memory Japan, Inc. and Micron Memory Taiwan Co., Ltd., respectively) will benefit Micron’s share in the memory market.
Micron is positive about its product launches and growing demand for its products, particularly SSD products. The company is also optimistic about supply/demand balance for DRAM and NAND memory chips in 2015, which should support prices.
Micron has been constantly innovating in memory technologies, spanning DRAM, NAND and NOR Flash memory solutions, which are being widely used in the latest mobile computing devices as well as in consumer, networking and embedded products.
With the market demand for cloud-computing expected to soar in the near future, Micron is also expected to gain and is definitely a stock to watch in 2015.
Headquartered in North Carolina, Red Hat Inc (RHT) happens to be one of the better performing cloud-technology developers worldwide. The company continues to gain market share and its Linux servers are well positioned to compete with Microsoft’s (MSFT) Windows in the enterprise market.
We believe that the company has significant growth potential in the public cloud segment over the long term. Red Hat’s strong product pipeline, continuing investments to expand product portfolio and partnerships with the likes of IBM, Dell and Intel (INTC) will drive overall growth.
Red Hat’s shares surged 20.7% yearly in 2014. Moreover, the company delivered average earnings surprise of 9.86% in the trailing four quarters. Currently, the stock has a Zacks Rank #3.
Outlook for 2015
Cloud computing has been called the way of the future.
However, investors should carefully consider what each company has to offer and decide if they are a good fit for the high-risk portion of their portfolio. All these stocks could be volatile, but given the rebounding economy, improving technology fundamentals and recent earnings estimate revisions, these could be potential outperformers in 2015.
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