The Wolfe Tech Universe rose by 5.5% compared with the S&P 500’s 2.5% increase. Semis rebounded by 7.5%, still the worst performing sector over 12 months but only trailing Software over 3 months. In general, underperformers bounced, such as Renesas (+21%), Universal Display (+15%), and Micro Focus (+10%). Rightmove and Infosys are now overbought; Xiaomi is oversold. Short interest in Lam Research, Broadcom, and Nvidia jumped higher (p4). We lean toward the skeptical side regarding the rally.
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IDC published worldwide PC shipment data today (01/11/19) after the close signaling a market units decline of 3.7% YoY in C4Q and full year decline of 0.4%. The sequential decline in the 4Q holiday quarter was the largest in six years. IDC pointed to sell through challenges in the quarter as a result of anticipatory inventory stockpiling in 3Q. In addition an uncertain Chinese business environment should cause buying pressure in the future, partially offset by the effects of the Windows refresh cycle. We see potential downside to our numbers for HP In. in F1Q19 and Dell in F4Q19 as a result of lower industry volumes.
The cloud in all its forms—private, public, and hybrid—is the most important enterprise computing trend of the last decade. Amazon started it with AWS in 2006, followed by Microsoft Azure in 2010 and Google Cloud Platform in late 2013. IBM and Oracle are the primary legacy players. The SaaS market is larger, but IaaS is more disruptive. Despite cloud starting a while ago, participants agree it is still early innings as reflected by IBM’s statement that only 20% of workloads have moved to a cloud. We intend to closely follow cloud developments this year.
Both the Wolfe Tech Universe and the S&P 500 were down 7% the past five days, but tech has outperformed year-to-date down just 2% vs the market’s decline of 8%. Note below that sector performance is quite similar over the past disastrous three months though Internet has lagged. Software and IT Services are up over the past year while Semis and IT Hardware are down the most.
We came into this year fairly optimistic about our names, thinking growth would give way to value (it didn’t the first nine months) and that tax reform and the weaker dollar would help. Trends look a bit weaker into 2019 as comps are tough, so earnings growth deceleration is the norm. Although that slowing is reflected by Street estimates, deceleration usually is not a good stock set-up. The two companies likely to see acceleration are Nutanix (hardware transition behind) and Juniper (MX to PTX transition behind).
Welcome to the first issue of Wolfebytes! Going forward this will be a weekend report focused on tech stock performance and should be of interest to both PMs and analysts. There are three sections: (1) Stock Review, highlighting best and worst performers by sector over the last week and year; most overbought and oversold names; earnings revisions; and changes in short interest; (2) Technical Analysis, in which technician Rob Ginsberg and we point out interesting chart developments; and (3) Quantitative Analytics, where we show various proprietary stock rankings from Chris Senyek and Yin Luo. It should be a quick read that prepares your mind for the coming week.
We initiate coverage of HP Inc with an Outperform rating and price target of $28 per share. The company has performed surprisingly well since the spin-off—finally an HP company deserves the “Reinvent” tag line. Near-term catalysts are few given the processor shortage and tariff risk. However, downside is limited, and we think analysts underestimate the long-term importance of 3D printing, creating an attractive risk-reward set up.
We assign a Market Weight to the group. Although IT Hardware tends to be a middle of the road performer given its maturity, there are interesting countertrends going into 2019. Positives include customers needing to spend on digital transformation and legacy vendors learning to embrace the cloud, creating software revenue. Negatives are a likely slowing in IT spending, the threat of public cloud to on-prem computing, and macro risks such as tariffs and the stronger dollar. It tends to be a trading group, providing investors ample opportunity.