2 technology stocks to buy

If we may be allowed to mix the musings of a former prime minister with a children’s pastime, The MoneyLetter recently spotted an American elephant and a Canadian mouse playing among the passing clouds. Here are two securities analysts’ reviews of global tech stock giant Microsoft and junior Canadian technology stock NexJ Systems.

Technology_StocksBlue chip stock Microsoft Corp. (NASDAQ—MSFT) bulls have high hopes for cloud computing service Azure’s revenue, but bears point to Azure’s current low gross margin as a drag on profits, according to UBS analyst Jennifer Swanson Lowe.

The analyst’s detailed analysis of company disclosures and industry benchmarks supports her view that Microsoft margins overall hold significant potential for expansion. Ms. Lowe gives this global blue chip tech stock a ‘Buy’ rating and $105 target share price.

She notes: “For fiscal 2020, we project a Microsoft operating margin of 34.5 per cent versus 33.5 per cent consensus, and we see both revenue beats and positive margin surprises driving the stock higher from here. For the third quarter of 2017 to the first quarter of 2018 we estimate Microsoft added $1.37 in Azure revenue year-over-year for every dollar of new Intelligent Cloud (IC) cost of goods sold (COGS). This is a reversal from the year-ago period when Microsoft added only $0.84 of Azure revenue for every new dollar spent on IC COGS.

“We expect Commercial Cloud to grow to $57 billion in fiscal 2022 with Azure driving $23 billion of the increase. We see existing workloads moving into the Cloud and more likely to be created in the Cloud, as companies invest in digital transformation. With Microsoft ranked as a top platform as a service (PaaS) provider by corporate IT leaders, we see the company as a share gainer in a market that Gartner Advisory projects reaching $113 billion by 2021.

“We see opportunities for Microsoft to drive better gross margins in non-Cloud businesses through efficiencies in other low gross margins, businesses like Xbox and Surface. We expect fiscal 2018 to mark the bottom for Microsoft’s gross and operating margins.

“We see Office 365 Commercial adding net $9 billion to revenue by fiscal 2022. We believe the conversion of annuity customers to Office 365, new user acquisition at the low end, and the up-selling of premium SKUs can drive $15 billion in new Office 365 revenue, more than offsetting $6 billion of lost annuity revenue.

“Microsoft is in the early stages of a likely decade-long corporate transformation, driving revenue growth and profit gains. We see near-term upside to estimates and further multiple expansion, as the company executes on digital transformation.

“We see a large growth opportunity ahead for Microsoft Azure, and expect that business to add $23 billion to revenue between fiscal 2017 and fiscal 2022, reaching $26 billion of revenue overall. However, given that Azure only recently turned gross margin positive, the concern we hear from investors is whether strong Azure revenue growth could put significant downward pressure on margins as the lower gross margin business represents a bigger part of Microsoft’s revenue mix.”

Software publisher NexJ Systems expanding

Toronto-based NexJ Systems Inc. (TSX—NXJ) is a provider of scalable, integrated cloud-based systems for customer relationship management (CRM) solutions. NexJ initially chose to target its CRM solutions toward the global wealth management and private banking industry (total addressable market (TAM) of over $800 million). The company has demonstrated success and scalability with over 20 leading wealth management and financial services companies deploying tens of thousands of users.

IA Securities analyst Blair Abernethy initiated coverage with a ‘Speculative Buy’ rating and a $4.50 target share price.

NexJ’s core product offering has recently been expanded with Customer Data Analytics and Intelligence (CDAi), an analytics and machine learning preprocessor. NexJ has also begun to pursue non-financial market opportunities for its CDAi product.

Mr. Abernethy says: “We believe that CDAi can be utilized as a key enabler and accelerator of emerging ML (machine learning) projects across any industry. NexJ is actively building a go-to-market partner channel and piloting CDAi in several new vertical markets. We expect to see first customer wins in this new area in 2018. We expect revenue growth of about 13 per cent to $31.2 million and earnings before interest, taxes, depreciation and amortization (EBITDA) margins of about 6.4 per cent in 2018. NexJ has about $16.5 million in cash, which we see as sufficient for its growth objectives.”

The company has “a growing base of recurring revenue (25 to 30 per cent) from maintenance contracts and, increasingly, SaaS (software as a service) subscription revenue. In recent years, large on-premise contract wins have resulted in lumpy license transactions and related IT professional services installation engagements. We expect that over the next few years NexJ’s revenue will increasingly become recurring in nature.

“Today, NexJ works with over 20 major active customers, the majority of which are in the Wealth Management vertical. We recently spoke with a number of these large customers at NexJ’s annual user conference and found them generally supportive of, and engaged with, NexJ’s solutions. NexJ is also actively upgrading its UI (user interface) and functionality and is working to deliver an expanded product offering in 2018, which we believe will help with maintenance pricing and renewal rates. In addition to its core customer base, we understand that there are several more potential financial and non-financial services sector prospects actively evaluating its platform.

“While NexJ has struggled to grow consistently in recent years, we believe the company is now in the early stages of a long-term sustainable growth opportunity, with a shift towards a greater mix of recurring revenue.”

NexJ Systems provides enterprise customer relationship management (CRM) solutions to the financial services industry in the United States, Canada, Asia Pacific, and Europe.

This is an edited version of an article that was originally published for subscribers in the February 2018/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

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