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Morgan Stanley Light On Tech But Likes Amazon, Microsoft, Comcast

Amid the sell-off in growth technology stocks in early 2016, Morgan Stanley still likes tech names with plenty of free cash, dividends, improving profit margins and rising market share. In a research report Wednesday, Morgan Stanley said its top tech picks include Comcast ( CMCSA ), T-Mobile US, Microsoft ( MSFT ), Amazon.com, Qualcomm ( QCOM ) and IBM. Morgan Stanley, though, is underweight on the technology sector overall, preferring utilities, financials and health care. “Relative to the broader market, we’ve seen more technology growth stocks with contracting multiples than any time in the last 10 years,” said analyst Adam Parker in the report. He also noted: “Since the (2008) financial crisis, technology stocks with improving margins have strongly outperformed those with high sales growth but no margin expansion.” Here’s what Morgan Stanley likes in some tech stocks: — T-Mobile ( TMUS ). “Competition in the wireless industry is intense,” but T-Mobile continues gain share with its Uncarrier-branded promotions vs. rivals. — Comcast. The cable TV firm has pricing power and invests wisely in broadband infrastructure and NBCUniversal, says Parker. — Amazon ( AMZN ). Its “retail and cloud businesses are both inflecting … which we see leading to higher than expected profitability,” wrote Parker. — Microsoft. It’s getting a boost from “real top-line drivers,” says Parker, citing its Azure public cloud computing business, data center share gains and Office 365 subscriber growth and pricing. — IBM ( IBM ). While IBM is the only large cap U.S. tech stock with institutional ownership at five-year lows, Parker says investors under-appreciate “an accelerating transformation to a more analytics- and cloud-friendly business.” — Qualcomm. “We are overweight as we think recent concerns regarding the royalty and chip businesses are overblown,” said Parker, who expects improving licensing fees in China.

Apple-FBI Encryption Battle, Facebook Arrest Flash At RSA

SAN FRANCISCO — Apple’s ( AAPL ) encryption battle with the FBI flashed again Wednesday as Silicon Valley bigwigs largely sided with the iPhone-maker during the RSA Conference in San Francisco, Calif., saying the policies of their companies also wouldn’t allow for government backdoor access. The debate at the big annual security event also followed the arrest Tuesday of Diego Dzodan, a Facebook ( FB ) exec in Brazil, who refused to decrypt WhatsApp communications in compliance with a government order. Dzodan’s arrest was yet another flash point in the ongoing battle. Wednesday, a Brazilian judge ordered police to set Dzodan free. At an RSA panel discussion Wednesday Michelle Dennedy,  Cisco Systems’ ( CSCO ) chief privacy officer, said the network gear giant, per policy, wouldn’t provide the government backdoor access to encrypted communications. Silicon Valley companies such as  Alphabet ( GOOGL ), Facebook and Microsoft ( MSFT ) also have sided with Apple. Congress has yet to legislate backdoors, and outdated telecom laws don’t tackle the now-hot topic. The Paris terror attacks and a mass shooting in San Bernardino, Calif., have reignited the issue on Capitol Hill, where legislators are weighing privacy concerns against law enforcement needs. In the latter case, the FBI ordered Apple to decrypt the iPhone belonging to one of the two San Bernardino shooters. Apple is fighting the order. Cisco’s policy would put it in the same hot waters, Dennedy said. “We do not intentionally build in backdoors, and we do not do business with others who do,” she said. “That is our policy.” Dennedy’s position was echoed throughout the discussion, entitled “Can Government, Encryption, Backdoor and Privacy Co-Exist?” Backdoor access can act as a master key to all encrypted communications within a system. Apple’s engineers haven’t created that key, Apple CEO Tim Cook says. Juniper Networks Saw A Backdoor Exploited Intentional or not, backdoor access will backfire, Johns Hopkins University associate professor Matthew Green argued Wednesday. In December, Juniper Networks ( JNPR ) discovered unauthorized code running on an operating system backing their firewalls that let hackers decrypt VPN-protected communications, Green said. Experts have speculated a National Security Agency random-number generator, employed by Juniper, was to blame for the exploited backdoor. “This is the danger with backdoors,” Green said. “Juniper was protecting the Department of Defense and could not keep people from monitoring their code.” Richard Marshall, CEO of Secure Exchange Technology Innovations, says companies need to concentrate on existing vulnerabilities within their systems. “You don’t need a designed vulnerability (such as with a backdoor) when there are so many other vulnerabilities being exploited on a day-to-day basis,” he said. “It’s so much easier for those adversaries to break into our systems and violate our privacy.” But the panelists didn’t side entirely with Apple. Marshall argued that U.S., and other, consumers have accepted the idea of reduced privacy. Chenxi Wang, chief security officer for Twistlock and the panel’s moderator, noted Apple pushed a U2 album out to millions of phones but won’t hand over the keys for government access. “Is this a double standard?” she asked. “This is beyond a double standard,” Marshall said. “This goes to the actual user and their reduced expectation of privacy. It’s a dangerous, slippery slope.” Dennedy, on the other hand, argued that the young-adult millennial generation is “crying” for privacy. Everything from their individualized clothing to the use of Snapchat messaging says as much. And therein lies the opportunity, she said. “People are trusting their commerce, their culture, their families and their communities to us (as corporations),” she said. “We have an ethical obligation to build privacy into their systems.” Her advice for companies? “Educate your users about what they are getting into rather than assuming, because they’ve fallen for your monopolistic practices, that they like it.” Image provided by Shutterstock .

Hewlett Packard Enterprise Still Wrestles With Cisco, Juniper

One day before Hewlett Packard Enterprise ( HPE ) was slated to post fiscal Q1 earnings, the stock of half of the old computing pioneer Hewlett-Packard Co. was up 4% in afternoon trading in the stock market today . The stock was doing what analysts expect it to do, outperforming the other half of the legacy company,   HP Inc. ( HPQ ), whose shares were up a fraction this afternoon. The stocks, of course, reflect the market’s interpretation of the companies’ operational performance since splitting into two from the legacy corporation in November.  HP, which reported earnings last week, kept the PC and printer businesses — and the old HPQ ticker. Hewlett Packard Enterprise kept the server, storage, networking, enterprise-software and cloud-migration businesses, seen as faster-growing endeavors, and kept the CEO, Meg Whitman, who still chairs both companies. Hardware and equipment-product sales comprise about 38% of Hewlett Packard Enterprise revenue, with services generating the rest. For the quarter ended Jan . 31, analysts polled by Thomson Reuters expect HPE to report earnings down 17% to 40 cents per share on revenue down 2.7% to $12.68 billion, vs. a pro forma 48 cents on $13.03 billion in the 2015 Q1. The company reports after the market close. HP Inc.’s Q1 EPS and sales each fell 12%, to 36 cents and $12.2 billion. For its first fiscal year ending in October, Hewlett Packard Enterprise expects EPS minus items of $1.85-$1.95, up from the $1.84 pro forma earned in 2015, on revenue of $50.81 billion, down 2.5% from the pro forma $52.12 billion of 2015. Analysts have modeled $1.87 and $50.73 billion. “We like HPE because decent execution should be sufficient to move the stock higher,” said UBS analyst Steven Milunovich in a February research note.  “We believe growth in servers, networking and storage, stabilization in high-margin technology services and continued improvement in the Enterprise Services margin should help close the gap between the current P/E of 7x and our target of 10x. “Storage head Manish Goel, as well as a few of our industry sources, say that HPE is taking business from Dell/ EMC ( EMC ) during their proposed merge.  Still, we think it’s time for Meg Whitman to provide a vision for the company. IBM ( IBM ) has cognitive computing.  What does hardware-heavy HPE want to be in 3-5 years and what will be its differentiation?” Nomura doesn’t cover HPE, analyst James Chen advised IBD Wednesday, but he and colleague Jeffrey Kvaal are watching closely as HPE competes with companies that Nomura does cover, such as  Cisco Systems ( CSCO ),  Juniper Networks ( JNPR ) and Arista Networks ( ANET ). Nomura said he expects 3% sales growth for HPE’s enterprise group this fiscal year, compared with Cisco and Juniper’s guidance ranges of 3% to 6%. Hewlett Packard Enterprise’s “projected growth rates are not likely to threaten networking incumbents, but don’t imply much share loss either,” the Nomura analysts said in a research note. HPE’s hybrid cloud business competes with IBM, Microsoft ‘s ( MSFT ) Azure, Amazon ( AMZN ) Web Services and Alphabet ‘s ( GOOGL ) Google Cloud Platform services. Big Data startup  Hortonworks ( HDP ), the Hadoop developer, on Tuesday said it would collaborate with HPE on the use of Apache Spark, making use of shared memory in HPE enterprise environments. UBS analyst Mulinovich, in his February note, said that “upon the split we argued in favor of HPE over HPQ stock. . . .  Hewlett Packard Enterprise has momentum with expected slight revenue growth in constant currency and an improving operating margin in fiscal 2016.” Wednesday afternoon, Hewlett Packard Enterprise stock was 13% off its Dec. 1 record high of 15.88, while HP Inc. was 26% off its record high of 14.82, set Nov. 24.