Thanks in part to the tax cuts passed at the end of 2017, companies have access to more cash than they can spend. And according to Morgan Stanley, M&A offer intensity—or the number of offers compared to the number of stocks—has increased from 2.5% in the last quarter of last year to 3.2% in the first quarter of 2018.
And among all sectors, tech has seen the second biggest increase in activity.
Given that, Morgan Stanley identified 10 tech companies that could likely receive offers in the next year.
“Our model, ALERT (Acquisition Likelihood Estimate Ranking Tool), combines stock characteristics, cohort membership, and data regarding offers to forecast probabilities that stocks receive tender offers in the coming 12 months,” Brian Hayes, the global head of quantitative research, wrote in a note Tuesday.
“On the one hand, stock-specific information, such as yield, leverage and valuation, impacts stocks’ offer likelihoods; on the other hand, recent activity levels in the cohorts to which a stock belongs (e.g. sector and size) tend to continue for some time, and this affects subsequent offer intensities for remaining stocks in those cohorts.”
Share prices can really soar when a takeover offer is announced, so there is a big advantage in identifying takeover targets early and correctly.
Here’s a rundown of the 10 stocks Morgan Stanley identified as the top targets in tech:
Arris International (NASDAQ: ARRS)
ARRS makes set-top boxes, broadband modems, and back-end connection equipment for cable TV and broadband services providers. Loop Capital Markets’ James Kisner has Arris International’s stock at a price target of $35, or 27% higher than Thursday’s close at $27.45.
Nuance Communications (NASDAQ: NUAN)
Nuance is best known for providing the tech for Apple’s Siri voice assistant. Analysts have projected, on average, 39% upside potential from current levels. Oppenheimer’s Shaul Eyal has this to say about NUAN:
“The speech market remains relatively under-penetrated, providing significant opportunity to expand market reach. As a stock, NUAN should benefit from the company’s market-leading position and nascent opportunity in speech solutions.”
Hubspot (NYSE: HUBS)
The digital marketing company provides cloud-based marketing and sales software platforms that include integrated applications such as social media, search engine optimization, blogging, website content management, marketing automation, email, sales productivity, CRM, analytics, and reporting.
On Thursday, Bank of America raised its price target for HUBS from $115 to $130, or nearly 19% higher than its closing price today.
Integrated Device Tech (NASDAQ: IDTI)
IDTI is an under the radar semiconductor company. The company is headquartered in San Jose, California, and has design, manufacturing, sales facilities, and distribution partners worldwide.
Analysts are predicting IDTI will announce $0.44 earnings per share (EPS) this quarter when it announces its next earnings report at the beginning of May. IDTI reported EPS of $0.35 in the same quarter last year, which indicates a positive year-over-year growth rate of 25.7%.
Cree (NASDAQ: CREE)
CREE shares jumped 7% this past Tuesday following an earnings beat for their fiscal third quarter. The chip and lighting company reported revenue of $356 million, up from $342 million a year ago, and with analysts only expecting a break-even quarter on an adjusted basis with $348 billion in sales.
One risk for CREE may be the ongoing trade dispute between the U.S. and China, especially for its LED business. However, the company’s new management already has plans to shift its focus away from its lightning business and instead focus resources on its smallest, albeit most profitable, power device and radio-frequency division, Wolfspeed.
Cengiz Balkas, general manager of the Wolfspeed business, said that the potential for the business is bigger than most can imagine. “We have a large, multi-decade opportunity ahead of us,” Balkas said, pointing to the rise of electric vehicles as a potential catalyst for the business in the coming years.
Lumentum Holdings (NASDAQ: LITE)
Lumentum shares are down this month with other optical names as the U.S. has banned domestic companies from selling components to smartphone maker ZTE Corp. after the company didn’t fulfill its promise to reprimand employees after its own sanctions violations. Fortunately, LITE wasn’t the hardest optical company hit on the news.
The stock did just receive a bullish call from David Williams at Drexel Hamilton. Hamilton sees the price spiking to $85, saying:
“Our investment thesis is primarily driven by the company’s more recent success in 3D sensing modules with Apple and expect a solid ramp into multiple Android customers in the coming several quarters. We are also highly encouraged by the acquisition announcement of Oclaro and expect benefits well beyond the cost synergies the company has pointed to.”
NCR Corp. (NYSE: NCR)
NCR is a hardware, software, and electronics company that produces self-service kiosks, point-of-sale terminals, automated teller machines (ATMs), check processing systems, barcode scanners, and business consumables.
The company is the world’s largest supplier of multivendor ATM middleware and applications, according to a report by research and consulting firm RBR, accounting for 32% of the global market – that’s 12 percentage points more than any other ATM software provider.
Ciena Corp. (NYSE: CIEN)
Ciena Corp is a global supplier of telecommunications networking equipment, software, and services.
Following a solid first quarter, William Blain analyst Dmitry Netis concluded that the stock has a compelling risk/reward ratio. Netis notes the way the company is diversifying as a positive and believes that the new customer wins in new territories like Japan and South Korea are a good sign the company is gaining market share. Netis said:
“We argue for a better multiple for Ciena shares due to higher quality earnings, above-market growth over the next three years, a leadership position in all segments of the optical market, improving operating margins and balance sheet (through the retirement of debt), and strong free cash flows ($150 million-$200 million over each of the past two years).”
Twilio (NYSE: TWLO)
Twilio operates as a “communications platform as a services,” or CPaaS, which is a means of running a company’s phone, text, and video services in the cloud for things like connecting cab drivers for customers like Uber.
Dougherty & Co.’s Catharine Trebnick initiated a Buy rating on the stock on April 10, with a price target of $45, saying the company “sits near the epicenter of enterprise digital transformation.”
Trebnick also noted that Twilio has 2 million developers worldwide working with its tools, and 48,979 customers “across a broad range of vertical markets,” including Facebook-owned WhatsApp, Salesforce, Snap, and Coca Cola.
Zynga (NASDAQ: ZNGA)
Zynga is a leading social game developer. Its games include FarmVille, Gems With Friends, What’s The Phrase, Black Diamond Casino, Hit It Rich, Zynga Poker, and Willy Wonka Slots.
The company has a market cap of just over $3 billion and its revenues have been growing by 22.43% on a quarterly year-over-year basis as of the company’s last quarterly report.
On Wednesday, the company announced a new partnership with BMW for the launch of the new BMW M2 Competition in CSR Racing 2 with improved AR capabilities and features, giving players an exclusive drag racing experience.