Wall Street is seeing a flurry of mergers right now. Tax cuts have freed up cash for deals, and the money is flowing. So which tech companies are likely to be snapped up next? Share prices can soar when a takeover deal is announced — meaning that there is big value in identifying takeover targets correctly.
Luckily Morgan Stanley put out a report identifying tech companies most likely to get acquired in the next 12 months. The bank noticed that acquisition intensity increased to 3.2% in Q1 from 2.5% in the previous quarter. “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,” revealed Brian Hayes, the firm’s global head of quantitative research.
I used TipRanks’ data to identify the most compelling stocks featured in Morgan Stanley’s report. These are the stocks with a notably bullish Street outlook and a ‘Strong Buy’ analyst consensus rating. The advantage of these three tech stocks is that they represent compelling investing opportunities- even if a takeover doesn’t materialize.
So with this in mind, let’s take a closer look now:
‘Strong Buy’ Takeover Target: Ciena Corp (CIEN) Source: Shutterstock
Ciena Corporation (NYSE:CIEN), is a tech stock focusing on telecommunications equipment. William Blair analyst Dmitry Netis likes the way the company is diversifying. He says new customers in new territories — such as Japan and South Korea — clearly show that Ciena has a leading product portfolio and market share gains.
“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, and strong free cash flows ($150 million-$200 million over each of the past two years).”
And don’t let a recent report that Ciena is seeing softness from AT&T Inc. (NYSE:T) faze you. The report alleges that the carrier is re-allocating capital dollars away from packet networking. However, after speaking with CIEN management, top Jefferies analyst George Notter says he sees “nothing wrong” with AT&T’s fiber-to-cell tower plans. He advises investors to focus on the big picture and reiterated his Buy rating and $31 price target.
Overall, CIEN has 9 recent buy ratings from the Street and 1 hold rating. These analysts see the stock spiking an average of 20% to $31.
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‘Strong Buy’ Takeover Target: Lumentum Holdings (LITE)
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Shares in optical networking giant Lumentum Holdings Inc (NASDAQ:LITE) are popping right now. Sparked by a robust earnings report, shares have risen 19% in the last week. Now LITE has received another bullish call from Rosenblatt Securities’ Jun Zhang. He sees prices spiking a further 37% to $80 and sets out his analysis here:
“With the best yield rate and quality consistency, we think Lumentum will maintain its leading position in the Android market. This will give Lumentum the first mover advantage to secure design wins in tier 1 android OEMs.” And as far as Apple Inc. (NASDAQ:AAPL) is concerned, Zhang writes: “We think Lumentum has 100% of the initial market share in the new iPhone dot projector.” This is the infrared technology Apple uses for facial recognition.
Plus, he is optimistic about the outcome of LITE’s Oclaro Inc (NASDAQ:OCLR) takeover — and the cost synergies that should materialize. The deal has run into some hiccups due to the loss of a key OCLR customer (Chinese hardware firm ZTE Corp.), but ultimately “Lumentum’s acquisition of Oclaro could allow LITE to become more competitive in both the 100G and 400G long haul transmission market.”
For the quarter, Lumentum reported revenues of $298.8 million (up 16.8% year-over-year), easily beating consensus estimates of $292.3 million. Meanwhile, EPS came in at $0.78 (+59.2% YoY) — again flying past consensus estimates of $0.71.
As you can see from this screenshot, eight top analysts have published buy ratings on LITE in the last three months. They see big upside potential of 43% from current levels.
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‘Strong Buy’ Takeover Target: Twilio (TWLO) Source: Web Summit Via Flickr
Cloud communications pioneer Twilio Inc (NYSE:TWLO) wants to ‘fuel the future of communications’. After going public in June 2016 at $15/share, prices surged to $71. But a 7-million secondary share offering saw the stock plummet just as fast. And on the shock loss of major customer Uber, shares sunk to just $23.
Now TWLO is on a roll again. In the last three months, prices climbed almost 85% to $44. So what does all this mean? Well word on the Street is decidedly bullish. Ahead of Twilio’s Q1 earning results on May 8, Oppenheimer analyst Timothy Horan ramps up his price target from $38 to $45.
“Strong stock performance YTD suggests that investor sentiment is shifting as investors better appreciate Twilio’s growth opportunity and strong competitive position” writes Horan. Looking forward: “We remain bullish and expect another quarter of strong customer additions and robust expansion of existing customers (ex. Uber). And while gross margin could fall QoQ in 1Q18, we see potential improvement later as Application Services contribution increases.”
In total, this ‘Strong Buy’ stock boasts 7 recent buy ratings vs just 1 hold ratings. On average these analysts see 6% upside potential from current levels. However, on the high-end Monness’s $60 price target from Brian White suggests much more appealing upside of 39%. He is very bullish on the company’s huge growth potential in a $45.4 billion market (based on estimates from IDC). Twilio currently has a US market cap of $3.59 billion.
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TipRanks offers investors the latest insight into Crypto via its powerful CoinWatch platform. As well as stocks, TipRanks tracks the market activity of over 40,000 financial experts. As of this writing, Harriet Lefton did not hold a position in any of the aforemen