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3 Stocks to Track in the Flourishing Computer Industry

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The coronavirus outbreak has benefited the Zacks Computer – Mini Computers industry by raising demand for PCs and tablets significantly. Despite massive supply-chain disruption, the ongoing work from home and online-learning wave has been beneficial for industry participants like Apple (AAPL - Free Report) , HP (HPQ - Free Report) and Lenovo Group (LNVGY - Free Report) .

Although extensive job losses are expected to hurt demand of high-end laptops and smartphones in the near term, the upcoming launch of 5G-based iPhones is a key catalyst. Further, launch of foldable as well as AI and ML-infused smartphones, tablets, wearables and hearables are major growth drivers for the industry participants.

Industry Description

The Zacks Computer – Mini Computers industry comprises prominent companies like Apple and HP that offer devices including smartphones, desktops, laptops, printers, wearables and 3-D printers.

Such devices are based either on Apple’s iOS, MacOS, iPadOS, WatchOS or on Microsoft Windows or on Google Chrome and Android operating systems. They predominantly use processors from Apple, Intel (INTC - Free Report) , AMD, Qualcomm (QCOM - Free Report) , NVIDIA (NVDA - Free Report) , Samsung, Broadcom and MediaTek, among others.

3 Mini Computer Industry Trends to Watch Out For

Bring Your Own Device (BYOD) Aids Momentum: The industry is benefiting from the rapid adoption of BYOD in workplaces. Enterprises practicing BYOD allow employees to use their personal devices, including mobiles, laptops and tablets, for work purposes. BYOD helps in bridging communication gaps between remote workers and desk-bound employees, thereby improving process management and workflow. Moreover, BYOD has been proved more productive as it lowers training time. Moreover, the coronavirus-induced remote working and online learning model bodes well for industry participants as demand is expected to increase for desktops and laptops.

Impressive Formfactor Drives Demand: Expanding screen size, better display and enhanced storage capabilities have been key catalysts driving the rapid proliferation of smartphones and tablets. This has been well-supported by faster mobile processors from the likes of Qualcomm (Snapdragon-branded), NVIDIA (Tegra X1), Apple (A14 Bionic) and Samsung (Exynos 9609). Moreover, improved Internet penetration and speed along with the evolution of mobile apps have made smartphones indispensable for consumers. Further, the improved graphics quality is making smartphones suitable for playing games like PUBG and Fortnite. This is expected to boost demand for high-end smartphones and open up significant opportunities for device makers.
 
PCs Face Extinction Risk: Personal computers (desktops and laptops), be it Windows or Apple’s MacOS-based, have been facing the risk of extinction due to the rapid proliferation of smartphones and tablets. Stiff competition from smartphones has compelled global PC makers to not only upgrade hardware frequently but also add apps and cloud-based services to attract consumers. IDC expects PC shipments to decline in 2020 due to lower commercial demand, which was strong in 2019 due to the transition to Windows 10. Nevertheless, the emergence of 5G, AI, machine learning and foldable computers is likely to be the key catalyst in expanding the total addressable market (TAM) of the PCs.

Zacks Industry Rank Indicates Solid Prospects

The Zacks Computer – Mini Computers industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #36, which places it in the top 14% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bullish near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic on this group’s earnings growth potential. Since Mar 31, 2020, the industry’s earnings estimates for 2020 have moved up 30.8%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Beats Sector and S&P 500

The Zacks Computer – Mini Computers industry has outperformed the broader Zacks Computer And Technology sector as well as the S&P 500 Index over the past year.

The industry has surged 98.8% over this period compared with the S&P 500’s increase of 13.1% and broader sector’s rally of 32.7%.

One-Year Price Performance

 

Industry’s Current Valuation

On the basis of forward 12-month P/E, which is a commonly used multiple for valuing computer stocks, we see that the industry is currently trading at 27.92X compared with the S&P 500’s 22.37X. It is also above the sector’s forward-12-month P/E of 25.68X.

Over the last five years, the industry has traded as high as 32.32X, as low as 10.12X and at the median of 14.78X, as the chart below shows.

Forward 12-Month Price-to-Earnings (P/E) Ratio

 

3 Computer Stocks to Keep a Close Eye on

Apple: The iPhone maker is benefiting from continued momentum in the Services segment, driven by robust performance of App Store, Apple Music, video and cloud services. Apple’s endeavors to open up its ecosystem, through partnerships with the likes of Samsung and Amazon, are a positive for the Services segment. Subscription-based video streaming, news and gaming services are expected to benefit from Apple’s strong installed base. Robust App Store sales coupled with solid adoption of Apple Pay and Apple Music helped Apple double its 2016 Services revenues six months ahead of its targeted 2020-end. Moreover, its wearables and hearables businesses are expected to be driven by solid demand for Apple Watch and Airpods.

Further, the Cupertino, CA-based company currently has more than 550 million paid subscribers across its Services portfolio. The App Store continues to draw the attention of prominent developers from around the world, helping the company offer appealing new apps that drive App Store traffic. Further, growing number of AI-infused apps will attract more subscribers on App Store. This Zacks Rank #2 (Buy) company now expects to reach its target of 600 million paid subscriptions before the end of calendar 2020. Additionally, the recently-unveiled Apple One bundled plan (will be available late this year) is expected to drive Services revenues further. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Moreover, Apple’s newly-launched iPad Air and Apple Watch 6 have significant prospects given the rising demand from enterprises and healthcare providers. The addition of Blood Oxygen sensor in the latest Apple Watch will further drive its adoption.

The Zacks Consensus Estimate for fiscal 2020 earnings has moved up 4.9% to $3.24 per share over the past 30 days. Shares are up 50.3% year to date.

Price and Consensus: AAPL

 

Lenovo Group: This Hong Kong-based company is dominating the PC market. The company is well-poised to gain from the ongoing remote working and online learning wave due to its ever-expanding portfolio. Per Gartner’s latest report, in the second quarter of 2020, Lenovo retained the top spot with a 25% market share, followed by HP’s 24.9%. The next three positions are held by Dell, Apple and Acer Group, with a market share of 16.4%, 6.7%, and 6.2%, respectively. (Read More: PC Sales Soar in Q2 on Increased Demand, Improved Supply Chain)

Lenovo’s position has also improved in the server market. Per IDC’s latest report, Lenovo and International Business Machines (IBM - Free Report) tied for the fourth spot in second-quarter 2020. Markedly, Dell Technologies grabbed the #1 position. (Read More: Server Vendors Gain on Coronavirus-Led Demand for Cloud Services)

The Zacks Consensus Estimates for fiscal 2021 earnings has been steady at $1.50 per share over the past 30 days. The stock is up 7% year to date.

Price and Consensus: LNVGY

 

HP – This Zacks Rank #3 (Hold) company is benefiting from solid PC demand amid the COVID-19 pandemic-led remote working and online learning wave. Solid revenue growth in retail solutions business and gaming as well as services orders is a positive. HP has been launching several innovative models in the PC segment as well as in the Printing segment. We believe that the continuous product launches will help this Palo Alto, CA-based company stay afloat in the current uncertain macroeconomic environment.

Furthermore, stringent cost-control measures are expected to drive margins over the long run. Moreover, HP expects to return at least $1 billion to shareholders every quarter in the near term, which is encouraging.

The consensus mark for fiscal 2020 earnings has increased 4.3% to $2.19 over the past 30 days. The stock is down 6.9% year to date.

Price and Consensus: HPQ

 

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