Cornelio Ash | WILLIAM O'NEIL+CO

Global Technology Sector— Software

Posted on November 28, 2018February 1, 2019 by Cornelio Ash

Are software stocks buyable after a 15% pullback off highs? In this report, Senior Equity Analyst Cornelio Ash details why he is cautious on software even though long-term growth drivers such as the transition to the cloud and AI remain intact after another strong earnings season.

Some highlights from this report:

After rising for 22 consecutive months, the North American Software Index ( IGV ) broke its uptrend in October 2018. The gaming industry is an area of concern, especially due to China’s recent censorship and gaming approval reform. Cloud and AI services are driving secular growth, benefiting companies that specialize in IaaS and Saas. Watch Cornelio Ash share his expertise in his Software Webinar on Thursday November 29 at 8am PT/11am ET.

Software

Posted on November 19, 2018February 1, 2019 by Cornelio Ash

Highlights:

The North American Software Index ( IGV ) remains under heavy distribution while trading below its 200-DMA. In October the IGV broke below a key level of support after trending higher for 22 consecutive months since January 2017.

Today we removed four key IGV constituents – ADBE, CRM, NOW, and PAYC – from the U.S. Focus List due to technical deterioration.

Global Technology Sector—Software

Posted on September 19, 2018February 1, 2019 by Cornelio Ash

Highlights from the report:

The North American Software Index ( IGV ) is up 31% year-to-date and remains among the leading groups in 2018. Constituents of the IGV are trading at a median 6.4x EV/S ( FY 2019 ) and have reported another better-than-expected quarter, highlighted by Q2 FY 2018 revenue and EPS growth of 15% and 27%, respectively, better than the entire S&P 500 (8%/21%) and the S&P 500 Technology sector (9%/23%). The attached report accompanies Cornelio’s webinar on Thursday, September 20 in which he gauges the health of the software uptrend and highlights his top software picks.

Global Technology Sector

Posted on August 2, 2018February 1, 2019 by Cornelio Ash

Key Points:

U.S.:

Although the semiconductor industry will continue to experience growth on an absolute basis this year, it is expected to grow at a more moderate pace than in 2017. Global semiconductor revenue is forecast to hit $451B in 2018, an increase of 7.5% y/y.

The SOXX benchmark significantly outperformed the S&P 500 in 2016 and 2017, but the outperformance has narrowed this year: the SOXX is up 10% YTD, versus 5.6% in the S&P 500. As we noted in the last sector report, we believe that the exceptional performance recorded by the SOXX in the last two years is likely not to be repeated in 2018.

Our top picks in the U.S. include Focus List-rated Monolithic Power Systems ( MPWR ), Pure Storage ( PSTG ), and Nvidia ( NVDA ).

Other stocks of interest outside our Focus List include: Qorvo ( QRVO ), Vishay ( VSH ), Cypress Semiconductor ( CY ), Advanced Micro Devices ( AMD ), and Interxion Holding ( INXN ).

EMEA:

European equities in the overall Technology sector continue to show strong momentum. YTD, the Technology sector in Europe, measured by the MSCI Europe Technology Index, is up about 11%, compared to a 0.2% gain in the STOXX Europe 600 benchmark.

Europe-based semiconductor/hardware companies on our Focus List include ASML Holding ( ASML.NL; ASML:NA; ADR: ASML ) and Logitech ( LOGN.CH; LOGN:SW: ADR: LOGI ).

Other European stocks of interest include S&T ( SANTX.DE; SANT:GR ) and Barco ( BAR.BE; BAR:BB ).

APAC:

Due to concerns regarding the U.S.-China trade war, flattening demand for smartphones, and overall decelerating growth in the global semiconductor industry, we remain cautious on the outlook of the industry in the APAC region.

Focus List-rated companies in the APAC region include: Samsung Electro-Mechanics ( SEM.KR; 009150:KS ), Samsung SDI ( SCT.KR; 006400:KS ), and Koh Young ( KYX.KR; 098460:KS ).

Global Technology Sector—Software

Posted on June 6, 2018June 6, 2018 by Cornelio Ash

Highlights from the report:

Software reported another better-than-expected earnings season. Q1 2018 revenue and EPS growth across constituents of the North American Software Index (IGV) increased by a median 14% and 27%, respectively, better than the S&P 500 (9%/22%) and Technology sector (11%/23%). The IGV is up 20% YTD (42% in 2017) and remains in a long-term uptrend.
Our top picks are VEEV and SPLK.

Global Technology Sector— Software

Posted on March 21, 2018March 21, 2018 by Cornelio Ash

Key Points:

U.S.

* Software continues to outperform and is the primary driver behind Technology’s leadership in 2018. The North American Software Index ( IGV ) is up 15% YTD ( 42% in 2017 ) and recently broke above its upper channel line for the first time since breaking out in early 2017.
* While we wouldn’t be surprised by a pause in the Software rally, we do want to reiterate that the move higher has been supported by strong fundamental growth as cloud adoption, led by Enterprise, Big Data, Gaming, etc., persists.
* In Q4 2017, revenue and EPS growth across IGV stocks increased by a median 15% and 19%, respectively, including 95% of stocks exceeding EPS expectations by 13% ( median ). IGV’s Q4 performance was much stronger than that of the S&P 500, which saw revenue and EPS increase 8% and 15%, respectively. This trend persists as we head into Q1 2018 earnings season. The IGV expects revenue/EPS growth of 11%/21%, versus 7%/16% for the S&P 500. The IGV currently trades at just 5.5x EV/S ( FY 2019 ).
* Top picks: SPLK, ATVI, MB, RP

Nintendo

Posted on March 12, 2018February 1, 2019 by Cornelio Ash

O’Neil Methodology
• The stock is consolidating along its 50-DMA and we advise adding to positions as it breaks through ¥50,000. Global markets came under selling pressure just after Nintendo reported better-than-expected Q3 FY 2018 results on February 1. The stock pulled back and bounced constructively off its 100-DMA.
• Since the launch of the Switch in March 2017, quarterly sales and adjusted EPS are growing by greater than double digits. The stock remains under accumulation, with its RS line at 52-week highs (outperforming index) and a positive A/D Rating of B-.
• Given the success of the Switch, we believe the stock price will test all-time highs of ¥73,200 (~+51%) over the long term.

Global Technology Sector

Posted on January 18, 2018January 18, 2018 by Cornelio Ash

Americas

Software: Median Q4 2017 revenue and EPS growth estimates of 14% and 11%, respectively, both above expected growth for the Technology sector (8%/9%) and S&P 500 (6%/9%). Sub-industries driving growth include big data, gaming, hyper-convergence, and enterprise. Top picks include Splunk (

), Activision (

), Red Hat (

), and Mindbody (

Hardware: Expect growth to moderate in 2018 after a strong 2016–2017. We believe that taking a more selective approach is prudent. Top picks include Applied Materials (

), Cypress Semiconductor (

), Marvell Semiconductor (

), Nvidia (

Semiconductor (

), and Universal Display (

EMEA

Software: Although growth ideas are limited across Europe, keep an eye on Compugroup Medical (COPX.DE), which has a first-mover advantage in an industry that has been impacted by massive regulatory change.

Hardware: European equities in the overall Technology sector continue to show strong momentum. Europe-based semiconductor companies on our Focus List are: ASML Holding (ASML.NL; ASML:NA; ADR: ASML) and AMS (AMS.CH; AMS:SW). Other stocks of interest include Nordic Semiconductor (NOD.NO; NOD:NO), Infineon Technologies (IFXX.DE; IFX:GR), and STMicroelectronics (STM:FR; STM:FP; ADR: STM).

APAC

Software: Stand out picks include Vakrangee (VKS.IN) and Tencent (TCNT.HK), however our top pick is Nintendo (NNDO.JP). We believe the Nintendo Switch has a chance to replicate the success of the Wii.

Hardware: the outlook for the semiconductor industry is mixed across Asia. Due to concerns regarding softening demand for smartphones, high profile stocks like Sunny Optical (SOPT.HK; 2382:HK), Largan Precision (LPC.TW; 3008:TT), and LG Innotek (LGO.KR; 011070:KS) were removed from our Focus List. We also recommend trimming exposure to tech heavyweight Samsung Electronics (SGL.KR; 005930:KS). Top Picks: NextDC (NXT.AU; NXT:AU), Tokyo Electron (RG@N.JP; 8035:JP), Accton Technology (ACC.TW; 2345:TT), Taiwan Semiconductor Manufacturing (TSM.TW; 2330:TT; ADR: TSM), and Parade Technologies (PDE.TW; 4966:TT).

Gaming

Posted on January 11, 2018February 1, 2019 by Cornelio Ash

We maintain a bullish outlook on large video game developers ahead of earning season. Top picks include Activision (ATVI), Nintendo (NNDO.JP), and Take-Two (TTWO).

Digital/Downloads account from more than half of total revenue for the top game developers, with ATVI leading at 81%.

The competitive gaming market, otherwise known as e-sports, is growing at a 35% CAGR (2015-2020) and is expected to double over the next three years.

Global Technology Sector

Posted on November 1, 2017November 1, 2017 by Cornelio Ash

Software
Strong Outlook for Enterprise Cloud
Following strength in Q1 and Q2, growth across cloud companies has persisted as fundamental trends remains intact halfway through Q3 earnings season. We continue to see accelerated adoption of cloud services across major industries (HCM, ERP, CRM) and impressive earnings reports/outlook from bellwethers MSFT. Despite significant price appreciation YTD, cloud-related names are not expensive. Currently, S&P 500 software companies trade at 6x (median) 2018 sales, while KPIs (e.g., recurring revenue, retention rates, etc.) support the secular shift from legacy/on-premises software to the cloud. Standout ideas from our Global Focus List include:
• ServiceNow is ahead of its long-term goal of penetrating 50% of the Global 2000 constituents by 2020. Achieving this long-term goal would
translate into revenues of $4B (four-year CAGR of 31%) and operating margin expansion from 16% to ~30%. On October 25, reported better-than-expected Q3 results and that it had 41% (815) of the Global 2000 as customers. The stock is trending along it 21-DMA.
• Adobe Systems reports on December 14, but it raised its FY18 guidance above consensus expectations after its recent Analyst Day. The catalyst behind the strong guidance was due in part to a price increase for Creative Cloud products (60% of revenue) and expansion of its TAM to more than $83B by 2020. In FY18 sees revenue and adjusted growth of 21% and 30%, respectively, as annualized recurring revenue (ARR) for Digital Media increases to +$1B. It is very difficult to find this level of growth among bellwethers. The stock gapped up on the announcement and is poised to trend higher.
• Autodesk is the market leader for computer aided design (CAD) with more than 30% market share in the global architecture engineering and construction (AEC) industry. in the middle of a transition from a license to SaaS model that is reminiscent of 2013 transition. Due to acceleration in its ARR over the last six quarters (+80%),should achieve revenue of $3.2B, EPS of $3, and FCF of more than $1B by 2020. The stock is due to report results by the end of the month; however, it is currently breaking out from a consolidation and remains buyable.