September has been anything but kind to tech stocks. After hitting a record high at the beginning of the month, fears that tech valuations had climbed too high crept into investors’ minds. As a result, tech stocks have been feeling the heat, with the NASDAQ down 10% since September 2. The index currently sits at 10,853.55, following its fifth decline in six sessions.
While September is traditionally a volatile month for Wall Street, the upcoming presidential election, ongoing pandemic and flaring U.S.-China tensions are also weighing on investors. However, analysts remind investors that beaten-down doesn’t mean out, arguing the weakness presents an opportunity to snap up some compelling names at more affordable price points.
To this end, we set out to find beaten-up tech stocks that still represent exciting opportunities, according to Wall Street analysts. Using TipRanks’ database, we pinpointed three such names. While each has dipped at least 15%, the Street sees a comeback on the horizon as they all earn “Strong Buy” consensus ratings. Not to mention substantial upside potential is on the table here.
Lam Research (LRCX)
Offering innovative wafer fabrication equipment (WFE) and services, Lam Research helps chipmakers build smaller, faster and better performing electronic devices. Even though shares have slumped by 19% since September 2, several members of the Street believe there’s still plenty of fuel left in the tank.
B.Riley FBR analyst Craig Ellis tells clients that strong foundry demand, a memory upturn and strength in China were the key drivers of LRCX’s impressive fiscal Q4 2020 performance. Revenue came in at $2.792 billion, reflecting an 11.5% gain and flying past the estimates. Although the company hasn’t fully caught up when it comes to fiscal Q3’s $300 million sales loss, management notes a significant portion has been recovered.
In China, the sales mix got a substantial boost, with it up 34% or 200 basis points quarter-over-quarter. “GM over-achieved, falling just 20 basis points to 46.1% on favorable execution and mix so was 120 basis points better despite high freight costs,” Ellis added. The bottom line? “Overall, strong LRCX execution,” Ellis stated.
The good news doesn’t end there. Its forward-looking guidance blew expectations out of the water, with its fiscal Q1 2021 revenue forecast of $3.1 billion landing $381 million above the Street’s call. Not to mention GM and implied OM were 130 and 290 basis points ahead of Ellis’ prior predictions, respectively, showing the company is “overcoming crisis headwinds,” in his opinion.
“Ahead, LRCX expects continued Memory outperformance as spend rebounds from relatively low CY19&20 levels, driven by an array of secular drivers, while it outpaces F&L revenue growth versus industry and sustains solid Services growth. We sense retained confidence in LT financial targets, aided by new product SAM expansion in high aspect ratio etch and atomic layer deposition tools. Elsewhere GM rise a solid 60 basis points to 46.5%, so are seven-plus quarters ahead of our forecast,” Ellis commented.
Even though this guidance is a major positive, Ellis argues there could potentially be even more upside in store. “Despite fiscal Q4/Q1 upside we believe a four-to-six quarter positive estimate revision cycle is possible ahead, led by a compute/server and 5G smartphone-led CY21 Memory capacity cycle, prospects for first in four-year synchronized global growth in CY21 to compliment secular 5G, AI, ADAS, and IoT gains for Foundry/Logic gains... We believe the CY23/24 base case and better case financial targets based on $60 billion and $70 billion of WFE at $15 billion/$31.00 and $17 billion/$34.00 not only remain realistic bogeys, but in our view have picked up demonstrably more pull-in tailwinds than push-out headwinds entering 2H20,” the analyst explained.
Based on all of the above, Ellis reiterated his Buy recommendation and $450 price target. Should his thesis play out, a potential twelve-month gain of 53% could be in the cards. (To watch Ellis’ track record, click here)
In general, other analysts are on the same page. With 17 Buy ratings and 3 Holds, the word on the Street is that LRCX is a Strong Buy. The $394.79 average price target brings the upside potential to 34%. (See Lam Research stock analysis on TipRanks)
Applied Materials (AMAT)
Moving on to another semiconductor company, Applied Materials also surprised the Street with its better-than-expected earnings results. With this strength set to continue into 2021, the 15% decline since September 2 presents an attractive entry point, according to the analyst community.
Writing for Craig-Hallum, five-star analyst Christian Schwab told clients, “The company is seeing a robust semi capital equipment spending environment continue with expectations for total WFE to grow 10%-15% in 2020 and for strength to continue in 2021.”
Adding to the good news, management said it was able to fulfill a significant portion of the $650 million in backlog it was unable to meet in the first half of the year. At the same time, order demand was strong and AMAT exited the quarter with total backlog flat. This demonstrates that the supply environment is improving and the demand outlook is strong, in Schwab’s opinion.
During the fiscal third quarter, semiconductor systems revenue was up 28% year-over-year, and at the mid-point of Q4 guidance, could be up 25% for FY20. The strength is coming from the foundry/logic and memory segments. “The company expects 2020 total WFE to be split ~55%/45% foundry/logic vs. memory spending and for WFE to grow in 2021 and see a similar split as 2020,” Schwab added.
When it came to applied global services, this area of the business gained 11% year-over-year in the quarter, with the company expecting this figure to keep on expanding. “The company continues to grow its Services business along with its growing install base. 60% of the Services and spare parts business comes from predictable recurring revenue in the form of long-term service agreements. This year these agreements have seen a renewal rate of over 90%,” Schwab mentioned.
It should be noted that display growth is slated to remain flat through FY21. That being said, Schwab sees some “encouraging signs in the high end of the market, particularly robust demand for 8K screens and adoption of OLED TVs.”
“Despite any macro concerns in this environment, management believes it has also demonstrated that semiconductors and supporting industries are essential. Customers continue to drive their product roadmaps and make investments. We expect the strong semiconductor capital equipment spending environment to continue,” Schwab opined.
Everything AMAT has going for it keeps Schwab with the bulls. Along with a Buy rating, the analyst leaves an $83 price target on the stock. This target suggests shares could climb 51% higher in the next year. (To watch Schwab’s track record, click here)
Are other analysts in agreement? Most are. 4 Hold ratings are trounced by 15 Buys, and therefore, the message is clear: AMAT is a Strong Buy. Given the $76.22 average price target, shares could surge 39% in the next year. (See Applied Materials stock analysis on TipRanks)
PTC Inc. (PTC)
Last but not least we have PTC, which is a global 3D design software company, with it boasting Internet of Things (IoT) and augmented reality (AR) offerings. Since September 2, shares have taken a 16% tumble, but several analysts see a turnaround on the horizon.
Wolfe Research’s Blake Gendron highlights its recent Onshape acquisition as a major positive for PTC. Onshape is a SaaS platform that combines CAD and IoT/AR apps through cloud data management.
Expounding on this, Gendron stated, “Core to our positive view of PTC is a CAD/PLM migration to that cloud that is largely out of the company’s control. Incumbency in design software is rooted in engineer familiarity (built over many years, hence the PTC/Onshape push for free student access), but the pandemic remains an unprecedented disrupting force that could compel customers to transition (even at enterprise level) and foster greater remote collab/efficiency (a key driver of the Onshape deal).”
The potential benefits from the Onshape deal go even further. “The other driver of the Onshape acquisition was PTC’s vision for greater IoT/AR adoption, a trend perhaps catalyzed by heightened safety measures post-downturn, but previously identified as an opportunity to leverage 3D design expertise in extracting/delivering greater data value across the manufacturing chain,” Gendron explained. That being said, PTC will need access to facilities to achieve this growth, which could be problematic thanks to COVID-19.
Given all of the above, even though PTC has lagged in the design space, specifically when it comes to PLM, Gendron sees it as “poised to capture better-than-expected share of 1) the SaaS PLM migration, and 2) cloud-enabled IoT/AR.”
On the valuation front, Gendron noted, “On our valuation and forward ARR, implied EV/ARR of 7.7x is below the average since fiscal Q4 2016, and is consistent with where PTC trades today. That said, execution on IoT/AR growth could see the stock re-rate higher.”
All of this prompted Gendron to leave his bullish call and $103 price target unchanged. This target conveys Gendron’s confidence in PTC’s ability to rise 25% in the next year. (To watch Gendron’s track record, click here)
What does the rest of the Street have to say? 9 Buy ratings and 2 Holds have been issued in the last three months. So, the consensus rating is a Strong Buy. In addition, the $100.50 average price target suggests 22% upside potential. (See PTC stock analysis on TipRanks)
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