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2 Stocks to Watch From the Challenging Computer Industry

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The Zacks Computer – Mini Computers industry is suffering from massive supply chain and logistical issues, along with several pandemic-related and geopolitical challenges, including the ongoing Russia-Ukraine war. However, the coronavirus outbreak has been beneficial for industry participants like Apple (AAPL - Free Report) and HP (HPQ - Free Report) . Despite massive supply chain disruption, the ongoing work-from-home and online-learning waves have been beneficial for them. Strong demand for high-end laptops and smartphones, particularly the availability of 5G-supported iPhones, has been a key catalyst. Further, the launch of foldable as well as AI and ML-infused smartphones, tablets, wearables and hearables is a major growth driver for the industry participants.

Industry Description

The Zacks Computer – Mini Computers industry comprises companies that offer smartphones, desktops, laptops, printers, wearables and 3-D printers. Such devices are based either on iOS, MacOS, iPadOS, WatchOS, Microsoft Windows, or on Google Chrome and Android operating systems. They predominantly use processors from Apple, Intel, AMD, Qualcomm, NVIDIA and Samsung. Expanding screen size, better display and enhanced storage capabilities have been key catalysts driving the rapid proliferation of smartphones. This has been well-supported by faster mobile processors. Laptops, both consumer and commercial, benefit from faster processors, sleek designs and expanded storage facilities. The addition of healthcare features has been driving demand for wearables.

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 proved more productive as it lowers training time. Moreover, the coronavirus-induced remote working and online learning model bode 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. 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 Dim Prospects

The Zacks Computer – Mini Computers industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #224, which places it in the bottom 10% of more than 250 Zacks industries.

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

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic on this group’s earnings growth potential. Since Jul 31, 2021, the Zacks Consensus Estimate for this industry’s 2022 earnings has moved down 3.7%.

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 Outperforms 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 returned 5.7% over this period against the S&P 500’s decline of 9.4% and the broader sector’s fall of 24.7%.

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 21.32X compared with the S&P 500’s 16.77X and the sector’s 20.14X.

Over the last five years, the industry has traded as high as 28.99X, as low as 21.32X and at the median of 24.98X, as the chart below shows.

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

2 Computer Stocks to Watch Right Now

Apple: This Zacks Rank #3 (Hold) company is benefiting from continued momentum in the Services segment, driven by App Store, Cloud Services, Music, advertising and AppleCare. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Apple’s near-term prospects are driven by the availability of the new Mac Studio and iPad Air. Apple TV+ is gaining recognition due to its award-winning shows. This bodes well for the Services segment. Services revenue growth is expected to be in strong double digits for the June quarter.

Apple currently has more than 825 million paid subscribers across its Services portfolio. The App Store continues to draw the attention of prominent developers worldwide, helping the company offer appealing new apps that drive App Store traffic. Further, a growing number of AI-infused apps will attract more subscribers to App Store.

The Zacks Consensus Estimate for fiscal 2022 earnings has been steady at $6.11 per share over the past 30 days. The stock has lost 20.2% year to date.

Price and Consensus: AAPL

 

HP: This Zacks Rank #3 company is benefiting from solid demand for PCs amid the pandemic-led remote-working and online-learning waves.

Furthermore, stringent cost-control measures are expected to drive margin over the long run. HP’s expectation of returning at least $4 billion to shareholders in fiscal 2022 is encouraging.

The Zacks Consensus Estimate for fiscal 2022 earnings has risen 1.4% to $4.31 per share over the past 30 days. The stock has lost 6.4% year to date.

Price and Consensus: HPQ


 



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