Tech Takes a Tumble

Tech stocks have taken a beating lately, presumably on concerns that their high exposure to foreign currencies will act as a drag on earnings for the remainder of this year, and possibly into 2016. There is no denying that the tech sector has a large exposure to currency valuations – the industry as a whole generates more than half of its income overseas – but we think the strong dollar is a temporary condition that is not likely to materially impact long term results.

Our reasoning is simple: Losing business to foreign vendors that can undercut your pricing due to their relatively cheaper currency can be far more damaging in the long run than having to discount the value of your sales revenue due to a change in currency values. The former condition may be permanent, while the latter is most likely is not. In other words, it is much more costly to replace a customer than it is to discount one for a while.

Of far greater importance in the long run is retaining – and growing – market share in the critical endpoints of the tech sector, especially mobility, cloud, and social. Looking out over the next five years, that is where the key battles for revenue will be won and lost, and not in currency wars that ultimately end up being a zero sum game.

Meanwhile, we will continue to keep you apprised of our portfolio holdings. In this week’s Next Wave Portfolio update, Rob DeFrancesco reviews FireEye, the company he named as “The One Tech Stock to Own in 2014” three months ago and is already up nearly 40% since then. This issue also includes an Investments Portfolio update from Linda McDonough on Cisco, which has risen steadily since we first recommended it in the inaugural issue of STI back in December of 2013.

NASDAQ Composite Index:                                                                       

Friday, March 27 = 4,891.22                                                    

Trailing 12 months = + 14.4%                                        

Trailing 7 Days = – 2.7%                                       

Trailing 4 Weeks = – 0.7%

Next Wave Portfolio Update—FireEye the Disruptor

By Rob DeFrancesco

fireeye logoSpeaking earlier this month at the Morgan Stanley technology conference, FireEye (FEYE) CEO Dave DeWalt focused on selling the idea that the monitor-and-alert security model just doesn’t cut it anymore. Even with all of the installed firewalls and endpoint protection solutions out there today, organizations are still getting breached. There is “a lot of wasted security money,” according to DeWalt.

The problem with the current model is it’s now made up of layers upon layers of defense solutions, all giving off alarms and alert notices, mainly for things that are unimportant. False alarms are a major limiting factor in security. Within all of the noise, important alerts can and do get lost. Many recent cyberattacks could have been prevented if the alerts associated with them had been noticed and acted on.

FireEye promotes a more proactive security model, one covering what it calls threat management. Instead of sitting around waiting to react to attacks, FireEye solutions are always on the hunt for hackers, continuously monitoring networks, servers and devices for signs of trouble. All entry points into the network are monitored, and to limit damage in case of a breach, assets inside the network are always tracked.

FireEye is seeing success with its model because security decisions are now being made much higher up the executive ladder, and CEOs are realizing changes need to be implemented to improve enterprise defense systems.

The wave of recent cyberattacks has prompted many organizations to reassess their current security situations. While certain industries have always tended to be big spenders when it comes to security (mainly government, financial services and energy), others that had been laggards (such as retail, healthcare and media/entertainment) are now becoming leaders.

As additional money gets allocated to security, more dollars are flowing into more proactive next-generation solutions. In the latest quarter, FireEye for the first time in its history closed a majority of business without the need for lengthy proof-of-concept trials, according to DeWalt. Purchase decisions are increasingly being made on the spot. This just shows how newer technologies are quickly getting worked into budgets.

Mobile security is a major new endpoint segment that holds a lot of promise for FireEye. At the Morgan Stanley conference, DeWalt called mobile “the most exciting opportunity we have over the long haul.”

The company’s mobile sensor solution (capable of running on iOS and Android) studies behaviors on devices in real-time, looking for significant changes to the baseline. The sensors aim to prevent the one big threat for mobile devices: keystroke logging, an attack that involves capturing all keyboard entries in the hopes of obtaining passwords and credit card/bank account information.

FireEye now has more than 1,100 channel partners ready and able to sell its portfolio of solutions and services. Since 90% of its business flows through the channel, FireEye puts a lot of emphasis on training and keeping partners up to date on the latest services and product updates. Since many new partners joined the network just in the last year, FireEye management expects a significant ramp in productivity across the channel program over at least the next four quarters.

Investments Portfolio Update—Cisco Systems

By Linda McDonough

Cisco logoCisco is an original member of the Smart Tech Investor Investments Portfolio, added on December 16, 2013 at a closing price of $19.91. Since then it has risen consistently, peaking a little above $30 at the beginning of this month before a recent 10% pullback. However, we still have an unrealized gain of 36% in the stock and still like it based on its relatively high STR (Smart Tech Rating) score of 6.9. A recent quote from the company’s CEO illustrates why we think Cisco still has a lot of upside potential in front of it:

“Every country, every city, every business, every home and every car is becoming digital. In our view, Cisco is better positioned than any other company to help our customers reinvent their business and technology strategies as they become digital organizations” – John Chambers, Cisco CEO, February 2015

Being the CEO of a public company requires a certain amount of grandstanding, a fact most investors take into consideration when digesting management’s boasting on quarterly conference calls.  However, the words above from Cisco’s CEO John Chambers, seem to reflect an accurate portrayal of Cisco’s potential.

The stock, which languished in the mid-20’s for the past 2 years, shot up 11% to $30 on February 11th when the company reported second quarter earnings.  Recent volatility has trimmed it back to $27 but a resurrection in revenue growth should lead the stock higher.

Revenue growth for a company with annualized revenue of $48 billion can be hard to come by.  In fact, Cisco’s revenue dropped as much as 8% from Q2 14 to Q4 14.  Investors were still skeptical when Cisco reported a 1% improvement in revenue for the quarter ending October 2014. However moods brightened considerably when the January quarter delivered a remarkable 7% increase!  Expectations for continued mid single digit growth confirm that the company’s new products are gaining traction.

Cisco’s introduction of the Nexus 9000, an industrial strength router for data centers is helping to propel growth.  The router, which was introduced last May, had 1,700 customers in the January quarter, almost triple the customers in the May 2014 quarter. Switching revenue, which includes the Nexus 9000, comprises 30% of Cisco’s total revenue and was up 11% in the most recent quarter.

Another tailwind for Cisco is the arms race between broadband providers to woo customers with lightening speed internet connections. Just this month Verizon chose Cisco’s Network Convergence System to help them upgrade their metro network to 100G.   This was a hotly contested win for Cisco.  Sterling Perrin, an analyst at industry rag Heavy Reading, gushed about the award, “this is a huge win for Cisco. Yes, it had been rumored, but it’s still shocking. This is akin to when Cisco won an optical deal at BellSouth in 2003 to get a foot in the door at the RBOCs and legitimize itself in the optical sector.”  As competitors race to upgrade their networks to handle the tsunami of video streams, data uploads and time sensitive sound bites (think tweets from the recent upsets in the NCAA Sweet 16 Bracket), Cisco should enjoy a larger portion of this capital spending.

Cisco continues to generate piles of cash.  In the most recent quarter, it produced $2.9 billion of cash, up 16% from the previous year.  This generously covers the company’s recently increased $970 million quarterly dividend payment.  Management just increased the dividend from 19c a quarter to 21c.  As it stands, investors enjoy a 3% dividend yield on a stock that is expected to grow earnings in the high single digits. Cisco’s results should continue to ride the wave of consumers’ insatiable demand for the Internet of Things, where our cars, bank accounts, email, telephones and even our light switches are connected and accessible at our fingertips.

Cisco remains a buy in the STI Investments Portfolio up to $35.

STI Portfolios
INVESTMENTS(close px)(close px)
3CA TechCA$32.90$32.29-1.9%
4Cisco CSCO$28.44$27.13-4.6%
Portfolio Average-3.1%
NASDAQ CompositeIXIC5026.424891.22-2.7%
5Nice SystemsNICE$59.80$58.80-1.7%
6Nimble StorageNMBL$23.57$21.51-8.7%
7Paycom S’warePAYC$33.77$31.84-5.7%
8Silicon MotionSIMO$27.71$26.06-6.0%
10Varonis SystemsVRNS$29.92$27.24-9.0%
Portfolio Average-3.4%
NASDAQ CompositeIXIC5026.424891.22-2.7%