8 Tech Stock Picks for 2008

Below are eight internet/tech stock picks for 2008 and the reasons why they should do well.

Akamai Technologies' (AKAM) Q3 indicated that the it has witnessed strong growth across all its core markets. AKAM reported a 45% YOY revenue growth to $161.2M, up 6% from the second quarter 2007. Its normalized net income of $62.4M is a 13% sequential improvement and a 49% increase YOY. The company's consolidated ARPU went up 18% YOY to $20,600; a 3% increase over the second quarter. Akamai, as the leading provider of internet content and application delivery services with differentiated services, is well poised to benefit from the expected strong sectoral growth in online gaming, online video, online commerce and online adverts. The company's partnerships (Apple (AAPL), Starbucks (SBUX)) and the launch of IP Application Accelarator Service bring in a positive sentiment. The "early guidance" for 2008 - a growth of 25% to 30% for both revenue and normalized EPS, bodes well for the stock.

Amazon.com's (AMZN) Q3 results and guidance for Q4 and FY '07 clearly surpassed the street expectations. The company had a 38% YOY growth (after adjusting F/X gains) in net sales which marked $3.26Bn for Q3. This was driven by strong growth in the North American Segment and the International Segment - YOY growth of 42% and 33% (F/X adjusted) respectively. The net income increased 313% YOY to $80M. The company's spending on technology and content came down to 6.4% of net sales from 7.5% of net sales a year ago. Amazon.com reported that more than 290,000 developers have registered to use Amazon Web Services [AWS] in Q3, up 25,000 from the prior quarter. The company has also launched 'Fulfillment by Amazon' in beta on the amazon.co.uk, amazon.de and amazon.co.jp websites. The company's agreement with Bill Me Later would result in savings, in the credit card processing costs. Kindle, Kindle and more Kindle - We believe that Kindle will turn out to be a money spinner for AMZN in 2008/09, in addition to strong growth expected in AWS.

Ctrip.com International (CTRP) is a leading aggregator of online travel booking services in China. The company has been a key beneficiary of the marked consumer shift in China over the past two years towards the more convenient and hassle-free e-ticketing vendors. Ctrip now effectively enjoys a near-monopoly in the Chinese online travel market due to its superior management execution, favorable brand positioning and reliable customer service. Ctrip's air ticketing revenue growth (70% in 3Q) is several-fold higher than the 15% growth in the overall air travel market due mainly to continued market-share gains from traditional travel agencies. The company has successfully differented itself from traditional mom-and-pop travel agents and should reap handsome rewards going forward considering the surge in traffic expected around the Beijing Olympics. The company continues to remain conservative about its earnings prospects (35% growth forecast in 4Q); however, having promised a 35% growth in 3Q as well and ending up with a 55% number, investors would be fair in expecting another blowout quarter from Ctrip. We reiterate: CTRP is the perfect long term play on the emerging Chinese middle-class and their rising purchasing power.

Microsoft Corporation (MSFT), a company worth around $390B, generates annual sales of around $60B; the company's biggest challenge has been sustaining the percentage gains in revenues. We view its recent foray into the home entertainment software business and Microsoft's server solutions as efforts to combat this challenge. In mid-October 2007, Microsoft launched Office Communication Server [OCS], its unified communications system, claiming it a complete transformation of the traditional PBX. While the market for unified communications has been slow in 2007, it seems to be poised for a rapid growth in 2008, as Gartner report puts it – the market "will enter an early mainstream adoption phase" this year. Adding to the momentum of Windows Vista and Office 2007 would be the proposed launch of major products like Windows Server 2008 and Hyper-V, its server virtualization strategy, coupled with the projected 10% growth for personal-computer unit sales in 2008. The aforementioned moves should help the company maintain the kind of quarterly revenue growth of 27%, experienced in 4Q'07, the fastest growth in revenues in seven years at Microsoft. Having said this, Microsoft shares are likely to serve well in 2008.

Gigamedia Ltd. (GIGM) derives it revenues from China, Taiwan and Europe. Despite a seasonally weak quarter, GIGM put up good third quarter results surpassing analysts' expectations. The company has been giving good earnings performance through its history – met or surpassed the expectations in the previous 10 quarters.The acquisition of a controlling stake in T2CN - China's largest on-line casual game operator, has helped the company to become the market leader in the Mahjong game. Asia remain one of the growth markets for GigaMedia. The recent investment in the South Korea based XL Games Inc. and Neostorm will strengthen GIGM's pan-Asian gaming platform. Neostorm's pipeline include four online casual titles with the launch date for three of them expected in 2008. Its exclusive three year license with Electronic Arts, announced on November 16, to operate NBA Street Online in HK, Macau and Taiwan would help the company to tap the Olympics fervor in these markets. With basketball being the most popular game in Taiwan, GIGM has found a suitable addition to its FunTown portal. The MMORPG Hellgate London is expected to be launched by the second or third quarter of 2008. Holic, another MMORPG, is expected in the second half of 2008.

Bankrate Inc. (RATE) is a leading online aggregator of consumer financial information and a leading pure-play in the financial advertising vertical. The company's proprietary content, extremely low cost organic traffic, extensive relationships with lenders in areas such as mortgages and deposits, and the unusually strong pricing power (8 price hikes since October 2005) place the company on a very strong footing. Although not completely immune to the mortgage meltdown, its diversified advertiser base (no advertiser accounting >5% of revenues) and continuing shift away from mortgages (deposits now account for a larger proportion of hyperlink table revenue than mortgages) should mitigate any major fallout. Bankrate appears very attractively priced at current levels at 10x consensus FY'08 EV/EBITDA, especially in view of the 55% growth in EBITDA seen in FY'07 and the 35% consensus CAGR through 2010.

Sigma Designs Inc. (SIGM) is a key player in the chip set market for the entertainment segment (primarily IPTV set-top boxes, DVD players and Portable Media players). The 3QFY '08 results released in late November further reflected the strong growth momentum of the company. The company has benefitted from strong sales of chip sets of IPTV set-top boxes (due to growing demand for IPTV set-top boxes worldwide) and blu-ray DVD players. The new segment, ultra wideband connectivity solutions also received good end-market response. Several key design wins during the quarter, reported by the company only justify the sturdy presence of the company in the chip market for entertainment segments. SIGM's dominant presence in the high growth IPTV set-top box chip set market (In June 2007, iSuppli estimated that IPTV video market will grow from around $1Bn in 2006 to more than $26Bn by 2011) and other high growth segments, coupled with design wins with major market players (AT&T, China Netcom and China Telecom amongst others) certainly augur well for the stock.

Synaptics Incorporated (SYNA), a leading developer of interface solutions for mobile computing, communications, and entertainment devices is another pick for 2008. Its fiscal 2008 first quarter results (released November 1st, AMC) were better-than-expected; earnings per share were 54c, 32% higher than the consensus estimate and quarterly revenue came in around $86.7M, a 58% YoY growth. As seen in the AAPL iPhone and the LG Prada, touch interface solutions like Syanaptics' touchpad solutions are becoming critical as device sizes continue to shrink with increasing features and complexity of functionalities. Synaptics' technology is already incorporated in a growing number of cell phones including LG's Prada touch-screen phone, launched earlier this year in South Korea and Europe. Moreover, the company has also signed up Samsung and Motorola. The management cited that new design wins are critical to its performance, as Synaptics has been branching out to gain new customers and expand its market reach. We believe that the idea of more and more cell phones adopting keyboard-less, touchpad-only interfaces (if only to compete with the iPhone) would further support the stock. Also, New York-based technology research firm ABI Research estimates that over 100M handsets with touchscreens will be shipped in 2008 and by 2012, that number is expected to reach 500M. Additionally, IDC forecasts that the portable PC market would grow 18% from 2007 through 2010. From a larger perspective, as a leading provider of user interface solutions, SYNA is well positioned to continue to benefit from the accelerating adoption of mobile devices (notebooks, cellphones, MP3 players, etc.). The company continues to execute its two-pronged growth plan, with its core PC and notebook business providing a strong foundation while its expansion into adjacent markets like cell phones, digital music players, and GPS is showing traction, which would be a significant positive catalyst going forward.

Closing Price of our picks as of Monday, January 7, 2008:

• AKAM - $31.6
• AMZN - $88.8
• CTRP - $53.3
• MSFT - $34.6
• GIGM - $16.6
• RATE - $44.5
• SIGM - $44
• SYNA - $39.2

Disclosure: none

Comments

[Tom B]

Let us know how much you lost in December.

[jonreagan]

Thanks for a very good and informative article....nice to see someone try to identify tech opportunities outside of the usual suspects of AAPL, GOOG, RIMM, INTC, etc.....the high profile names are always subject to suspicious "downgrades" and gaming, especially just before earnings announcements.

The only one of your picks I'd be nervous about is Amazon....because it's a retailer. In spite of its annoucement of "its best year ever"--which I don't doubt--it's unfortunately a great stock in a bad neighborhood. Same dynamic is happening in financials as GS gets trashed along with shit-houses like Citi, Bear Stearns, Countrywide, etc. Nobody said markets were rational.

[Ouch]

Wow...Synaptics tanked 2 days after this was published...