Out on Wall Street, who has been leading the charge forward? Tech. After the space’s key players dragged the market lower in September due to overheated valuations, tech is once again at the helm.
The rise in tech makes sense. The pandemic helped accelerate a move toward remote work and telecommuting, and this in turn has put a premium on tech products. From the 5G rollout, to improvements in semiconductor chips, to the expansion of IoT and smart device capabilities – tech is everywhere, and it’s growing fast.
Bearing this in mind, we turned to Needham, which lands among the top ten on TipRanks’ list of Top Performing Research Firms, for some inspiration. The firm’s analysts highlight three tech stocks that appear especially compelling, noting at least 30% upside potential could be in store for each.
We’ve used the TipRanks database to pull the details on these three tech picks, to find out what makes them such compelling opportunities.
Silicon Motion (SIMO)
Bringing extensive experience to the table, Silicon Motion provides high-performance storage solutions widely used in smartphones, PCs, data centers and commercial and industrial applications. Following a bang-up quarter, Needham believes this tech name has a bright future ahead.
Writing for the firm, analyst Rajvindra Gill tells clients that based on SIMO’s preannouncement, Q3 sales are set to land 8% above his original forecast, with EPS also beating his estimate by $0.09.
What was behind this solid showing? A recovery in client SSDs. In Q2, SIMO's client SSD business, specifically the module maker component, declined as NAND flash makers allocated NAND capacity away from client SSDs to hyperscalers, to support the spike in data consumption on the network. However, the opposite happened in Q3. Along with a pause in hyperscale spending, module customers were allocated additional NAND capacity as NAND pricing declined quarter-over-quarter.
To this end, Gill thinks NAND pricing could decline another 5-10% quarter-over-quarter in Q4. He added, “We expect the decline in NAND pricing to further stimulate client SSD adoption in Q4 as this market is quiet price elastic, especially the channel markets.”
To a lesser extent, a rebound in China handsets along with a continued ramp of 5G handsets contributed to SIMO’s strong performance, in Gill’s opinion.
What’s more, the analyst argues that next-generation gaming consoles and desktop gaming could further boost SSD demand. Gill points out that based on reports from MSI, the board maker for Nvidia GPUs, demand for less expensive SSDs for higher-end gaming desktop computers is on the rise.
Expounding on this, Gill stated, “This could be potentially COVID-19 related demand as more people (of all ages) stay home and find more time to play video games. Moreover, we expect SIMO to participate in the next-generation gaming consoles (PS5, Xbox) coming out in the Fall. SIMO is shipping its PCIe SSD controllers into five out seven of the NAND makers sold into the game consoles; we believe two out of five could be SIMO's suppliers.”
If that wasn’t enough, even though the penetration rates for laptops remain relatively high at 80-90%, Gill believes attach rates for SSDs in the desktop market could accelerate, driving upside in CY21.
Given all of the above, Gill stayed with the bulls. Along with a Buy rating, he keeps a $55 price target on the stock. Investors could be pocketing a gain of 30%, should this target be met in the twelve months ahead. (To watch Gill’s track record, click here)
Turning to the rest of the Street, the bulls have it on this one. With 4 Buys and a lone Hold, the word on the Street is that SIMO is a Strong Buy. At $49.60, the average price target implies ~18% upside potential. (See SIMO stock analysis on TipRanks)
As a business cloud software specialist, Domo helps its customers integrate data from any source, turn data into live visualizations and extend BI into apps. Based on positive momentum as well as new deals, Needham thinks that now is the time to snap up shares.
After the company reported impressive fiscal Q2 2021 results, 5-star analyst Jack Andrews stands squarely with the bulls. Revenue of $51.1 million blew both his and the consensus estimate out of the water. Additionally, subscription revenue, billings and non-GAAP EPS exceeded his expectations.
“In our view, Domo appears to be benefiting from tailwinds related to the ongoing pandemic and improved sales execution (i.e. playbooks and an improving partner ecosystem) as it closed a notable amount of large deals within the quarter,” Andrews explained.
According to management, demand for digitizing business processes and real-time analytics is accelerating as a result of the pandemic. It’s also seeing more customers allocate IT budgets to modernizing BI and gathering insights from dark data. To this end, DOMO finalized multiple over $100,000 deals in hard-hit industries like fitness and manufacturing. On top of this, it closed a multi-million dollar deal with one of the world's largest retailers that began with the initial use case of creating insights across its analytics stack, but now extends to new use cases such as an application for store restocking.
Andrews also points out that momentum from the state-level COVID tracking continues to work in the company’s favor, as the state of Iowa expanded significantly and extended its contract by two years. With the help of a partner, it inked a seven-figure contract to power a public-facing website to track pandemic funding grants in early fiscal Q3 2021.
What’s more, Andrews highlights the “encouraging commentary” from management on its path to cash flow breakeven, which should “alleviate any remaining financial concerns.”
To sum it all up, Andrews stated, “We believe Domo has created a unique platform levered to the future requirements of enterprise analytics (self-service and scalability) without the exorbitant costs of implementation. As management executes changes in its sales strategy, we believe Domo, which trades at an EV/revenue multiple discount, can close the relative valuation gap to its Big Data software peer group.”
In line with his optimistic approach, Andrews reiterated a Buy rating and $61 price target. This target puts the upside potential at 46%. (To watch Andrews’ track record, click here)
When it comes to other Wall Street analysts, opinions are split evenly. With 3 Buys and 3 Holds assigned in the last three months, DOMO earns a Moderate Buy consensus rating. Clocking in at $47.17, the average price target implies 13% upside potential. (See Domo stock analysis on TipRanks)
Everspin Technologies (MRAM)
Last but not least, we have Everspin Technologies, which develops and manufactures discrete magnetoresistive RAM or magnetoresistive random-access memory (MRAM) products, including Toggle MRAM and Spin-Transfer Torque MRAM (STT-MRAM) product families. While the company has faced headwinds recently, Needham believes that MRAM could be a long-term winner.
Firm analyst Rajvindra Gill, who also covers SIMO, is a serious fan. Consistent with the broader industry, data center demand has been moderating, which coupled with COVID-19-related headwinds, resulted in Q3 sales guidance that missed the mark.
It should be noted that STT-MRAM is almost completely data center, while Toggle has some data center exposure since Toggle is used in RAID controllers. Additionally, thanks to COVID-19, there has been a surge in data center demand in the first half of 2020, boding well for MRAM. However, by the end of Q2, there was an increase in customer inventory.
“While this increase is partially due to supply chain concerns, we believe the main reason is a potential peak and expected slowdown in data center demand... However, we view the data center inventory digestion as a temporary setback, with a recovery expected in Q4,” the analyst commented.
Adding to the good news, MRAM thought that COVID-19 would negatively impact its ability to secure new design wins. That said, design wins grew by 16% quarter-over-quarter in Q2, which is over three times higher than the prior-year quarter. Gill mentioned, “We expect growth to re-accelerate as the market recovers.”
The company kicked off mass production shipments of 32Mb Toggle MRAM product to a growing set of customers, with it planning to add different package and temperature grades to expand to new customer applications. If that wasn’t enough, the second pivotal design win for MRAM’s 1Gb STT-MRAM product is expected to start production shipments in Q3 “into a persistent memory application for an OEM that sells into data center.”
Although gross margins were temporarily soft for Toggle and STT-MRAM due to the work-from-home environment, Gill argues that in the next few quarters, margins for both are likely to recover, driven by manufacturing efficiencies and lower material procurement costs.
Everything that MRAM has going for it convinced Gill to maintain his Buy rating. In addition to the call, he left the price target at $10, suggesting 44% upside potential.
Looking at the consensus breakdown, it has been quiet when it comes to other analyst activity. As Gill is the only analyst that has published a review recently, MRAM has a Moderate Buy consensus rating. (See MRAM stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.