Technology: This Firm Is the Newest Software Empire

• Overall, we view the technology sector as fairly valued at a market-cap-weighted price/fair value of 0.98; meanwhile, there are some opportunities in telecommunications at 0.93.
• Regulation and competition have battered the Mexican wireless business, but a rational three-player market is poised to emerge.

Salesforce.com has evolved from a salesforce automation point vendor to a full-fledged cloud-based customer relationship management, or CRM, software behemoth. The company has been the key forerunner for software as a service, or SaaS, and we believe the firm is among the most advantageously positioned companies in software to capitalize on the ongoing secular migration to the cloud. We think the market is underappreciating the opportunities Salesforce has to not only grow its business via its existing products, but also through greenfield opportunities. Salesforce has consistently gained annual share across each of its product buckets, yielding leadership positions in salesforce automation (45% share), customer service (18%), marketing (12%), and overall CRM spending (20%).

We believe enterprises will increasingly look to consolidate application spending around full-featured suites, leaving Salesforce as the most likely beneficiary in the CRM market, propping up significant top- and bottom-line growth for several years, along with a nice runway for operating leverage.

The Current State of the Mexican Wireless Market Is Unsustainable

Wireless data demand is increasing rapidly in Mexico, and the steady adoption of LTE smartphones should stoke continued rapid growth over the next several years. This growth provides a mechanism to enable a recovery in Mexican wireless revenue. More importantly, we believe wireless data demand will necessitate increased network investment and a resulting increase in fixed operating expenses that will accentuate the cost advantage that America Movil's massive scale provides. This cost position should enforce pricing discipline on both Telefonica and AT&T.

In addition, we believe both Telefonica and AT&T will seek to earn reasonable returns on investment in Mexico over time, which will require substantially higher wireless prices. Looking at wireless spending in other Latin American countries, we also believe Mexican consumers are in a position to spend more.

Given the importance of the Mexican wireless market to America Movil, our view of this business has particularly large implications for the firm. We expect normalizing Mexican wireless prices will drive a rebound in growth and profitability well beyond what other investors (and the current market price) assume. As a result, we believe America Movil shares are among the most attractive within the North American telecom sector.

Top Picks

Cognizant Technology Solutions

CTSH

Star Rating: 4 Stars

Economic Moat: Narrow

Fair Value Estimate: $69.00

Fair Value Uncertainty: Medium

Five-Star Price: $48.30

We view Cognizant as a leader within the IT services market. The company has a proven track record of providing differentiated industry-relevant solutions that have led to significant client intimacy and recurring sticky business, as evidenced by our narrow economic moat rating. The firm has a fine balance between the consulting-centric incumbent operating model and the offshore industrial model that relies on lower-cost delivery, allowing the company to appear as either a U.S. or Indian firm, as circumstances dictate.

We believe that Cognizant's level of reinvestment has been a key to its above-industry growth performance, and, while the firm does not pay a dividend, we think its focused capital allocation has led to differentiated intellectual property and particularly strong positions in the healthcare and financial services industries. In our opinion, Cognizant is also well-positioned to address the burgeoning digital and cloud agendas of clients, which will be an area of long-term growth for the company. As a result, we expect Cognizant to sustain its long-term leadership in the IT services market. Finally, we also believe that Cognizant has relatively less exposure within Europe, a region where we don't foresee tremendous growth in the near term.

Salesforce.com

CRM

Star Rating: 4 Stars

Economic Moat: Wide

Fair Value Estimate: $99.00

Fair Value Uncertainty: High

Five-Star Price: $59.40

Salesforce.com is one of our best ideas in the technology sector, as we believe the shares of this wide-moat software firm have meaningful upside to our $99 fair value estimate. Salesforce is the world's leading software-as-a-service provider, and although it has had extraordinary success since its launch in 1999, we believe the market is underappreciating the broad opportunity that awaits the firm, as the enterprise cloud migration still has plenty of runway left.

Salesforce's primary customer relationship management suite is the most cloud-ready, scalable offering on the market, in our view. Although Salesforce has built its suite via a mix of internally developed technology and acquisitions, the company has been highly selective in how it builds and integrates software products (in particular, limiting itself to purchases of cloud-native application vendors such as ExactTarget), allowing it to build a complete, end-to-end customer relationship management platform. The firm's flagship salesforce automation is the largest and most mature product, but the company is seeing more than 20% revenue growth across its other major product categories, including Service Cloud, Marketing Cloud, and App Cloud, the last of which is one of the most promising offerings in the rapidly broadening platform-as-a-service market. Further, as the firm's billing mix tilts more toward renewals versus new business, Salesforce should generate significant operating leverage via sales and marketing and research-and-development spending, yielding consistent margin expansion for several years.

America Movil SAB de CV

AMX

Star Rating: 4 Stars

Economic Moat: Narrow

Fair Value Estimate: $18.00

Fair Value Uncertainty: High

Five-Star Price: $10.80

America Movil's valuation has taken a beating on the competitive troubles in Mexico and the recent currency weakness across Latin America, especially in the Mexican peso. We can't predict currency moves, but we believe the dollar- and euro-based investments that competitors have made in Latin America, coupled with the tendency for telecom spending as a percentage of consumer expenditures to remain fairly stable over time, should serve as a long-term currency hedge.

America Movil dominates many of the markets it serves, to a much greater extent than the typical North American company. The Mexican wireless market is the firm's most important business at around 15% of service revenue and 30% of EBITDA. We expect a turnaround in pricing over the next few quarters, resulting in a lift to margins and cash flow, fueling our favorable view of the stock.

Beyond Mexico, the firm has a solid position in Brazil, with a strong wireless business and cable assets that have enabled it to take share in the broadband market. America Movil is the largest wireless carrier in Colombia and has a fixed-line presence in that market as well. The firm is one of two or three dominant providers in several other markets, including Argentina, Peru, Chile, Puerto Rico, and Ecuador.

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