The red-hot tech sector may still have long-term value.
After another huge year in 2017, technology stocks are off to a roaring start in 2018. Just two weeks into the year, the Technology Select Sector SPDR (ticker: XLK) exchange-traded fund is already up another 4.5 percent.
Tech stock traders are loving the bullish momentum, but long-term investors may be questioning some of the inflated valuations. Despite the concerns, Morgan Stanley analyst Brian Nowak says some of the hottest tech stocks of the past several years will continue to be top performers for years to come.
[See: 7 of the Best Tech Stocks to Buy for 2018.]
Here are nine tech stocks Morgan Stanley still loves.
Alphabet (GOOG, GOOGL)
Roughly 80 percent of Alphabet’s Google ( GOOG, GOOGL) total advertising revenue comes from its core Websites segment. Despite some concerns over slowing growth in this core business, Morgan Stanley predicts Google will once again find a way to top market growth expectations via innovation and monetization improvements. Morgan Stanley is projecting 20 percent growth from Google’s Website segment this year and 36 percent growth in mobile search. The firm expects Google to offset rising traffic acquisition costs by maintaining operating and spending discipline. Nowak predicts 2018 earnings per share of $43.26, roughly 4 percent above consensus estimates.
Facebook (FB)
Morgan Stanley says Facebook ( FB) will overcome a 4 percent decline in core ad load in 2018 and deliver advertising revenue above consensus expectations. The firm is calling for a 20 percent increase in ad pricing this year and an overall 32 percent rise in ad revenue. Instagram, which may hit 1 billion monthly active users by mid-2018, will continue to be a major growth source, and streaming video could also be a multi-billion long-term opportunity. In the near term, Facebook will need to overcome any short-term bumps to ad revenue due to changes it plans to make to its News Feed.
Amazon.com (AMZN)
It seems as if Amazon.com ( AMZN) has been outperforming the market every year now for a decade, but Morgan Stanley expects more of the same in 2018. In fact, Nowak says Amazon has a clear path to $2,000 per share if it successfully executes its cloud, e-commerce, and omni-channel retail strategies. Amazon Web Services, Amazon Prime subscription fees and digital advertsing provide three sources of high-growth, high-margin revenue for years to come. As always, Amazon will continue to reinvest in its business in areas such as Alexa and international video, laying the foundation for the next era of revenue growth.
[See: 7 Stocks Primed for an Amazon Buyout.]
Priceline Group (PCLN)
Morgan Stanley is bullish about the online travel sector this year, and Priceline Group ( PCLN) will be one of the primary beneficiaries. Nowak says the online travel space is a secular growth story, even with increasing competition from Airbnb. He estimates Priceline will report 14 percent growth in bookings and 16 percent growth in room nights in 2018. Morgan Stanley also sees 8 percent upside to consensus earnings expectations in both 2018 and 2019. Finally, at a forward price-earnings ratio of just 22.7, PCLN stock is still a reasonable value.
Expedia (EXPE)
Together, Morgan Stanley expects Priceline and Expedia ( EXPE) will capture 95 percent of the long-term growth in the online travel space. Nowak says Expedia’s focus in increasing its international hotel supply, particularly in targeted European and Asian markets, is a good long-term strategy. Expedia is gaining ground on Priceline in terms of international supply. Morgan Stanley estimates Expedia will grow core room nights by 14 percent in 2018 and another 13 percent in 2019. Over time, Nowak says integrating HomeAway’s listings with Expedia and Hotels.com will increase Expedia’s leverage in the alternative accommodations market as well.
Activision Blizzard (ATVI)
Morgan Stanley is anticipating an 11 percent EPS beat from Activision Blizzard ( ATVI) in 2018 on the strength of “World of Warcraft” expansion, strong performance from “Call of Duty” and a second wind from “Candy Crush.” In addition, Activision could get some surprise upside from King advertising and Blizzard mobile game launches this year. The eSports business is a wildcard, and Nowak says any positive developments in terms of monetizing the business or positive announcements on streaming deals or sponsorships could be bullish catalysts. Nowak says the digital transformation in gaming will drive Activision stock higher for at least another three years.
Zynga (ZNGA)
Third-party data suggests Zynga’s ( ZNGA) fourth-quarter numbers could be a bit disappointing, but Morgan Stanley expects the social gaming stock to find its footing in 2018. Nowak says fourth-quarter bookings growth may come in as low as 5 percent, in line with company guidance after five consecutive quarters of beats. Morgan Stanley anticipates four game launches in 2018 will collectively contribute roughly $35 million in bookings. In addition, the firm estimates the recent Peak Games acquisition could contribute $60 million in 2018 bookings and $15 million in adjusted earnings before interest, taxes, depreciation and amortization this year.
GrubHub (GRUB)
There’s no question Uber Eats and Amazon Restaurants will continue to expand their food delivery businesses, but Nowak says GrubHub ( GRUB) has handled competitive pressure just fine for more than two years. Morgan Stanley estimates the online food delivery market is a $220 billion market that is still mostly untapped, with just about a 7 percent penetration rate to date. Following its Eat24 acquisition, GrubHub has a 50 percent lead on the nearest competition in restaurant supply. Nowak says GrubHub’s larger revenue base will enable the company to scale more efficiently than competitors and capture the lion’s share of the market.
[Read: Look to Tech Stocks for Big Dividends.]
Zillow Group (Z)
Morgan Stanley says Zillow Group ( Z) is a high-risk, high-reward play with more potential positive catalysts than negative ones. After a tough 2017, Nowak says Zillow stock currently has an attractive valuation. The stock trades at just 25 times 2018 EBITDA estimates, near the bottom of its historical valuation range. Nowak says Zillow is the best-in-class play in an attractive online home sales market. Morgan Stanley projects 19 percent annual revenue growth and 35 percent annual EBITDA growth over the next five years. Potential resolution of an ongoing dispute with the Consumer Financial Protection Bureau could also kick-start the stock in 2018.
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It’s Not Too Late to Buy Alphabet Inc (GOOG, GOOGL) and Facebook (FB) Stock originally appeared on usnews.com
