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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. The declining demand for PCs has become a concern for industry participants. Nevertheless, strong demand for high-end laptops is benefiting Apple (AAPL - Free Report) and Lenovo Group (LNVGY - Free Report) . Improving the availability of 5G-enabled smartphones has been a key catalyst for industry participants. The growing adoption of tablets among enterprises bodes well for companies like Apple and Lenovo.  The launch of foldable, and AI and ML-infused smartphones, tablets, wearables and hearables is another major growth driver for the industry participants. Robust demand for production printers, materials and software bodes well for 3-D printing solution providers.

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 Google Chrome and Android operating systems. The companies predominantly use processors from Apple, Intel, AMD, Qualcomm, NVIDIA and Samsung. Expanding screen size, better display and enhanced storage capabilities have been the 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 the demand for wearables.

 

3 Mini Computer Industry Trends to Watch

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 connect remote workers and desk-bound employees, thereby improving process management and workflow. BYOD has proved more productive as it lowers training time. Moreover, the coronavirus-induced remote-working and online-learning models 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 the 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 (A16 Bionic) and Samsung (Exynos 9609). Improved Internet penetration and speed, along with the evolution of mobile apps, have made smartphones indispensable for consumers. Improved graphics quality is making smartphones suitable for playing games like PUBG and Fortnite. This is expected to boost the 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 ones, 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 of 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 #227, which places it in the bottom 9% 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 bearish 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 bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. Since Mar 31, 2022, the Zacks Consensus Estimate for this industry’s 2022 earnings has moved down 2.9%.

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, Lags S&P 500

The Zacks Computer – Mini Computers industry has outperformed the broader Zacks Computer and Technology sector but lagged the S&P 500 index over the past year.

The industry has dropped 27.1% over this period compared with the S&P 500’s decline of 19.8% and the broader sector’s fall of 34%.

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 19.35X compared with the S&P 500’s 16.92X and the sector’s 19.49X.

Over the last five years, the industry has traded as high as 32.32X, as low as 11.49X and at the median of 20.94X, 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 the 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 launch of the latest iPhone models, with iPhone 14 Pro witnessing strong demand. Apple TV+ is gaining recognition due to award-winning shows. This bodes well for the Services segment.

Apple currently has more than 900 million paid subscribers across its Services portfolio. The App Store continues to draw the attention of prominent developers worldwide, helping it offer appealing new apps that drive App Store’s traffic. A growing number of AI-infused apps will attract subscribers to the App Store.

The Zacks Consensus Estimate for fiscal 2023 earnings has declined 0.6% to $6.19 per share over the past 30 days. The stock has lost 27.1% in the past year.   

Price and Consensus: AAPL

 

Lenovo: This Zacks Rank #3 company is benefiting from the ongoing digitalization efforts by enterprises worldwide and faster adoption of the hybrid work model.

Lenovo’s healthy cash balance is also helping it increase investments in research & development.

The Zacks Consensus Estimate for fiscal 2023 earnings has been unchanged at $3 per share over the past 30 days. Shares of LNVGY have declined 27.7% in the past year.

Price and Consensus: LNVGY


 



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