Wolfe Research Tech Strategist, Steve Milunovich, hosted a webcast with James Cortada, Senior Research Fellow at the University of Minnesota. Cortada worked at IBM for 38 years, including 1969-1982 when Big Blue was fighting with the DOJ. He explains what it was like at IBM then, the impact on the company, and potential lessons for tech regulation today. He is the leading historian of IBM with his book IBM: The Rise and Fall and Reinvention of a Global Icon.
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The recent weakness in ISM New Orders affirms our concern about the divergence with tech’s multiple. We remain underweight Semis but move to overweight Software.
We have been concerned that an economic upturn is not at hand, which gained support from the decline in the Nov ISM New Orders reading to 47.2%. Although tech earnings have softened normally for a late cycle, the lack of P/E contraction has made the stocks vulnerable. Given risk of lower multiples and optimistic consensus earnings estimates, we expect a 5-10% pullback over the next few months, which might then provide a buying opportunity. Broad tech has been a market performer since our initiation, and we remain market weight.
Hybrid cloud is now the accepted term, but under that umbrella there are important trends both on- and off-premise. As companies go through digital transformation, they must update their legacy infrastructure, either by going to the public cloud, establishing a private cloud, rearchitecting on-prem for simplicity, outsourcing to a vendor, or embracing a combination. Vendors well positioned include Microsoft, Amazon, Intel, Nvidia, VMware, and potentially Nutanix. IBM, Oracle, HPE, and perhaps even Cisco are disadvantaged.
The Wolfe Tech Universe rose 1.7% during the Thanksgiving holiday week, ahead of the S&P 500’s 1.0% gain. Software (+2.3%) led for the third week in a row and has almost retaken the 12-month performance lead from Semis. Recently soft Internet was boosted by strong returns in eCommerce (+3.8%) heading into the year’s biggest shopping weekend. Top performers included Nutanix (+28%), Ocado (+18%), Zscaler (13%), Dynatrace (10%), and Cloudflare (10%). Laggards were Dell (-10%), Palo Alto (-8%), HPE (8%), Lenovo (-7%), and Catcher Tech (-7%).
Along with our Dean’s List of 30 longs and shorts, we highlight names with expected earnings acceleration or deceleration in our Earnings Momentum screen. The idea is that when the fundamentals improve, they usually improve more than expected and the consensus also underestimates the degree of change on the downside, resulting in earnings surprise. We look for (1) companies with consistent improvement or deterioration in estimated YoY earnings change the next 3-4 quarters, and (2) companies with improving momentum whose stocks have underperformed the last year or with decelerating gains that have outperformed. Investors should use the lists to prompt further investigation.
Wolfe Research Tech Strategist, Steve Milunovich, hosted a webcast with Mike Levin, of Consumer Intelligence Research Partners. Topics discussed include: Survey results revealing consumer perspective on tech companies; How consumers really buy and use tech today, including smartphones, smart speakers, media services, and ridesharing; and Analysis of AAPL, AMZN, SPOT, UBER, LYFT, GOOG, and others.
The Wolfe Tech Universe was flat the past week, narrowly outperforming the S&P 500’s 0.3% decline. Software had another strong performance at +2.2% and is once again the top sector over 12 months (Exhibit 1). Semis lagged at -2.9% with Cap Equipment taking a 6% hit. Top performers this week included Splunk (+18%), 58.com (+14%), Yandex (+13%), Dynatrace (+13%), and Paycom (+13%). Laggards were Pure Storage (-16%), KLA Tencor (-11%), TripAdvisor (-10%), PagSeguro (-10%), and Applied Materials (-10%).
As global business becomes more connected, data-driven decision making (DDDM) is being employed. A recent 451 Research survey finds 19% of organizations use data to guide nearly all strategic endeavors while an additional 43% say it drives most strategic decision making. Benefits of DDDM include developing new products and services, lowering costs, enhancing customer service, and increasing sales. It is beneficial for enterprises to align with DDDM, but limited budgets, privacy concerns, and integration can make it difficult.
We hosted Wolfe industrials analyst Nigel Coe and 451 Research’s Ian Hughes, who presented thoughts on the development of the Internet of Things. We’ve pointed out that the computing business swings from centralized to decentralized technologies and back. The follow-on to the current cloud centralization likely will be a pendulum reversal to the edge, which includes billons of sensors requiring local processing capabilities and enabled by 5G and AI. The hype is starting to turn into reality.
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