UBS sees its ‘ABCs of tech’ at an inflection point

UBS says AI, big data and cybersecurity are at an inflection point that should see faster adoptions of the next few years.

Demand for what it calls the “ABCs of tech” is underpinned by “powerful secular trends around automation, analytics, and security,” UBS strategist Sundeep Gantori wrote in a note.

“We forecast the combined revenues of the three segments will grow from USD 386b in 2020 to USD 625bn in 2025, implying an average clip of 10% annually, higher than the mid- to high-single digits we forecast for the broader tech sector (NYSEARCA:XLK),” Gantori said.

“We think investors would be best rewarded by investing in a diversified group of incumbents and disruptors exposed to the three key segments,” he said. “We are reducing disruptors’ weighting to 10% (and increasing incumbents’ weighting to 90%) due to near-term valuation uncertainty amid a rising rate backdrop.”

Disruptor stocks on the focus list:

1. CrowdStrike (CRWD) – “Strong secular tailwinds from growing cloud computing market will help to bolster its topline growth.”
2. Fortinet (FTNT) – “Being a leader in the cybersecurity space, we believe it is well positioned to capture secular growth trends.”
3. Palo Alto Networks (PANW) – “Longer term, we expect the company to gain share in the highly fragmented cyber security industry due to its differentiated platform and targeted acquisitions, as well as its increasing focus on cloud-based security solutions.”
4. ServiceNow (NOW) – “ServiceNow is well positioned to capture the growth in demand for digital transformation services, thanks to its strong competitive product ecosystem.”
5. Splunk (SPLK) – “The company should continue to see strong revenue and billing growth driven by continued adoption by new users as well as strong renewal rates and upsell activity into its installed base.”
6. Workday (WDAY) – “We believe it is well-placed to leverage on cross-sell opportunities in planning, procurement, and analytics software.”
7. Zscaler (ZS) – “Being a leader in the cybersecurity space, we believe it is well positioned to capture secular growth trends.”

Incumbent stocks on the focus list:

1. AMD (AMD) – “As a key incumbent in the ABCs of tech, AMD is well positioned to ride the secular growth in data centers, AI, consoles, and accelerators, given it leading positions in both the GPU and microprocessor segments.”
2. Alphabet (GOOG) – USB favors “Alphabet for its best-in-class AI-driven search and advertising.”
3. Amadeus IT Group (OTCPK:AMADY) – “We believe its constant product and services innovation revolving around the integration of machine learning models will help to enhance its value proposition.”
4. Applied Materials (AMAT) – UBS favors “AMAT due to its leadership in semiconductor equipment, an industry that stands to benefit from strong chip demand driven by big data and AI.”
5. ASML (ASML) – “We think ASML deserves a premium valuation (P/E) given the company is well positioned to benefit from rising silicon content in smart devices and its migration to advanced technology extreme ultraviolet lithography products.”
6. Broadcom (AVGO) – “Broadcom is attractively valued (P/E basis) given its steady revenues growth and strong free cash flow generation.”
7. Capgemini (OTCPK:CGEMY) – UBS likes “Capgemini for its competitive AI and analytics services, allowing enterprise customers to implement ready-to-market AI and big data solutions.”
8. Check Point Software (CHKP) – UBS favors “Check Point for its consistent share Global equity focus list, buyback strategy, relatively attractive free cash flow yield, and renewed efforts to invigorate growth through product innovations.”
9. Cisco Systems (CSCO) – “We believe its constant product innovation in the field of cyber security and AI will help to fuel long-term growth.”
10. Cognizant Technology (CTSH) – A “leading IT service provider with strong capability in scaling AI initiatives for enterprise clients.”
11. Dell (DELL) – “We believe Dell will remain as a dominant player as the demand for big data and AI integration among enterprises is likely to increase over the next decade.”
12. Gartner (IT) – “Gartner is well positioned to benefit with its robust access to data, technology spending and consulting services.”
13. HP (HPQ) – “HP is well-positioned in the still-nascent 3D printing market.”
14. Intel (INTC) – “We expect the company to make significant improvements in its manufacturing process and limit share losses to manageable levels.”
15. Lam Research (LRCX) – UBS likes “LAM Research for its leadership in the semiconductor space, with memory capex spending as a strong long-term catalyst.”
16. Marvell Technology (MRVL) – “We expect the company to surpass its longer revenue model given a robust order book across all end-markets.”
17. Micron Technology (MU) – “Micron’s profitability should improve amid firm DRAM pricing and continued cost improvements.”
18. Microsoft (MSFT) – “Its valuation is still attractive compared to its large-cap peers on a free-cash-flow basis.”
19. MSCI (MSCI) – “MSCI is poised to benefit the most from strong growth in its big data solutions.”
20. Nvidia (NVDA) – UBS likes Nvidia “given its leading position in the GPU market, an important semiconductor used for AI.”
21. Oracle (ORCL) – “We believe estimates have likely troughed and expect stabilizing revenue growth in its cloud and big data offering.”
22. Taiwan Semiconductor (TSM) – UBS favors “TSMC for its defensive business model and exposure to multiple long-term growth segments like artificial intelligence and the Internet of Things.”
23. Texas Instruments (TXN) – TXN should “benefit from the increasing semiconductor content in automobile industry, with AI and big data as additional catalysts.”
24. Thomson Reuters (TRI) – TRI expected to “continue gaining market share, supported by its differentiated product offerings to knowledge workers.”
25. VMware (VMW) – “VMWare will benefit from the growing trend of enterprises’ migration to cloud.”

SA contributor JR Research is advising buying tech hand over fist.