Technology stocks are expected to report better earnings result in the second quarter of 2014 compared with the previous quarter. So far, total earnings are up +14.1% on +7.3% higher revenues. Impressive results from Apple Inc. (AAPL - Analyst Report), Intel Corp. (INTC - Analyst Report), Micron Technology (MU - Analyst Report) and Facebook (FB - Analyst Report) have raised investors’ expectations.
Total earnings for the Technology sector are expected to increase +9.5% from the period last year on +5.7% higher revenues. This would follow +3.7% earnings growth for the sector on +3.1% higher revenues in the first quarter.
The most notable feature of the second-quarter results is that they are not confined to any particular sector. The broad-based growth has been driven by solid results from semiconductor stocks, mobile solutions, Internet services and cloud computing providers.
The first half of 2014 continues to witness mainstream adoption of cloud computing by enterprises. The rapidly growing amount of data, complex infrastructure and inability to constantly scale resources at regular short intervals has compelled enterprises to turn to cloud computing vendors.
The ongoing transition from on-premise to cloud is expected to be a major growth factor for service providers such as SAP AG, Salesforce.com Inc, Netsuite and Marketo. Aggressive growth in cloud computing has also increased the demand for security software providers like Akamai Technologies, Symantec and Check Point.
Semiconductors are playing a crucial role in developing the Internet of Things (IoT) technology for mainstream adoption. Moreover, growing involvement of Apple and Google, the developers of the two most used ecosystems (iOS and Android), are also positive on IoT’s growth.
Although these are good news for investors, the broad-based growth has made it significantly difficult for them to pick a sure-shot winner.
With the help of Zacks proprietary methodology, investors can select stocks that have the combination of a favorable Zacks Rank — Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — and a positive Earnings ESP.
Earnings ESP helps to determine which stocks have the best chance to surprise with their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
Here are three stocks that meet both the criteria:
Synaptics Inc. (SYNA - Snapshot Report) – This Zacks Rank #1 company, scheduled to report the fourth-quarter 2014 results on Jul 31, has an Earnings ESP of +4.07%. This human interface solutions developer has outperformed the Zacks Consensus Estimate in two out of the trailing four quarters with an average positive surprise of 5.7%.
Synaptics’ dominant position in the touch-based interface market is a major growth factor. The growing adoption of fingerprint sensors will also boost the top line. The acquisition of fingerprint sensors developer, Validity, will increase its total addressable market and competitive position in the fast-growing biometrics market.
Synaptics’ recent takeover of Renesas SP Drivers, a leading supplier of display drivers for smartphones and tablets will further boost its top-line growth and competitive position. Renesas SP is a key supplier of display drivers for Apple’s (AAPL - Analyst Report) iPhone.
Moreover, continued program wins from Samsung remains a major positive despite a slowing high-end smartphone market and pricing pressure.
Iron Mountain Inc. (IRM - Analyst Report) – This Zacks Rank #2 company, scheduled to report the second-quarter 2014 results on Jul 31, carries an Earnings ESP of +12.82%. This storage and information management service provider recently received approval from the Internal Revenue Service (IRS) to operate as a real estate investment trust (REIT).
Iron Mountain rents out 66 million square feet storage space around the world and the storage segment contributed 59.6% of revenues in the first quarter.
We believe that Iron Mountain’s strong product portfolio, increasing market share and promising international business are the primary growth catalysts. Moreover, the company’s entry into the data center market could act as a positive factor.
However, costs related to conversion and fluctuations in recycled paper prices are the near-term headwinds for the company.
DTS Inc. (DTSI - Snapshot Report) – This Zacks Rank #3 company, scheduled to release second-quarter 2014 results on Aug 11, carries an Earnings ESP of +66.67%.
DTS’ focus on improving penetration in the connected device market is a key growth catalyst. Moreover, strong product portfolio, increasing online availability and accelerated expansion into new markets, such as smartphones, portable devices, digital media players and the smart TV space are other positives.
On the other hand, unpredictable macroeconomic environment, weakness in the consumer electronics market and sluggish consumer spending are the near-term headwinds. Moreover, higher costs are likely to hurt profitability in the near term.
We believe that continuing adoption of cloud computing will drive growth through the rest of 2014. Big Data, IoT and Bring Your Own Device are other major growth trends. We also believe that the Tech sector will continue to see further consolidation in the second half of 2014. Investments in new technologies like flash storage and faster processing chips are long-term growth opportunities.