Increasing fears that the technology sector is approaching full valuation with some stocks well above a reasonable valuation is making investors jittery. This is partly the reason for the poor performance of the technology sector in the past week. It’s a bit too early to tell if this is in fact a longer trend that will continue for the months ahead.

The good news is, there’s no major catastrophe about to hit the sector -- that’s not the reason big tech is down. It is rather a dash of investor caution, which is actually a good thing. Especially since it’s following continued positive news flow, new innovations and new opportunities.  

Apple’s (AAPL Quick QuoteAAPL - Free Report) WWDC event and Alphabet (GOOGL Quick QuoteGOOGL - Free Report) joining Amazon (AMZN Quick QuoteAMZN - Free Report) in the $1000 club, Facebook taking WhatsApp off IBM's (IBM Quick QuoteIBM - Free Report) cloud and Toshiba handing out another letter to Western Digital (WDC Quick QuoteWDC - Free Report) were the top news stories from last week.

Apple WWDC

There were a lot of details at Apple’s annual event where it characteristically didn’t shed much light on the new iPhone. Here are a few high points-

HomePod: The new Home device from Apple called HomePod, is rather expensive at $349. Slated to launch this December, it will work seamlessly with Apple Music (something Apple is playing up), but it’s otherwise similar to other voice-activated digital home hubs from competitors.  

Mac Update: Apple says its new iMac Pro is its "most powerful Mac ever," based on some attractive features like the 1080p FaceTime camera and real-time 3D rendering. The new device will be available in December and will sell for at least $4999.

Watch Update: The Watch is getting many new faces. Other than the Kaleidoscope and Toy Story faces, there’s one Siri -owered watch face that changes information on the watch face depending on your needs, an Activity face that displays your goals/targets and workout face that displays workout information and plays music during your workout. The Watch will also double as a flashlight when you work out at night. The music app on the Watch plays from multiple playlists and supports improved integration with the Airpods.

Apple Pay Update: With iMessage integration, Apple Pay will be easier to use. The iOS 11 upgrade to Maps will now include malls and inside spaces, so the transaction can be tracked from internal maps to the completion of the sale and the collection of fees related thereto.

AR/VR: Its ARKit allows app makers to make use of camera and sensor data to map digital objects into 3D space. With the ARKit, software developers will be able to create AR apps that will run on any Apple device. Since it is already a leading seller of premium devices, this will get AR into many more hands than any competing platform and will be a big draw to enterprise customers.

Regarding VR, Apple is targeting VR content creation for Macs and already has developers working on the new iMac and High Sierra OS. It’s also working with HTC Valve, Unity and Unreal to bring more content to Apple devices.

Siri: With iOS 11, Apple will introduce a better Siri that can help with translation and speak in different voices. With SiriKit developers can use Siri in third-party apps, thus improving its productivity. In iOS 11, Siri will be able to recognize your voice, the context of your query, your interests and how you use your device to anticipate and address your needs before you ask it.

Alphabet, Amazon Join $1000 Club

In two successive weeks the two companies saw their share prices cross the $1000 mark. When this happens, it’s obviously an indication of investor confidence in the way the company has done over the years as also its prospects of continuing on the growth path. In Alphabet’s case, it remains so strongly positioned in the search advertising market and so successful in other initiatives like Google Play, YouTube, GSuite and Hardware, with so many attractive moonshots like self-driving cars, fiber, biotech, etc. and such a strong balance sheet, that investors are willing to discount the risks associated with its continuing antitrust proceedings with the EU and others.

In Amazon’s case, the company has grown into the dominant retailer in the U.S. with growing penetration in many international markets. It also enjoys a first-mover advantage in IaaS services where it continues to add services, lower costs and add to its client roster.

Facebook to Move WhatsApp from IBM Cloud

Facebook is now moving WhatsApp from IBM’s Softlayer severs to its own in an attempt to improve synergies and lower costs. The shift has taken some time because when it acquired WhatsApp, Facebook was in the process of moving Instagram in-house. Facebook also reportedly takes time with these things possibly to ensure that the transition is smooth. This isn’t necessarily a negative for IBM cloud services because it was an inevitable thing, but it is something of a blow for its infrastructure services revenue as the market is very competitive with Amazon, Microsoft and Google. Notably, WhatsApp wasn’t a top five customer for IBM.

Toshiba Issues Second Warning Letter to Western Digital

There are some interesting developments on this front as June 15, the day Toshiba will decide a winning bidder draws close. First, Foxconn said that Apple and Amazon were joining its effort to buy Toshiba’s stake in its JV with Western Digital. Then Toshiba sent a second letter warning WDC to stop interfering with the sale process. And third, Western Digital has apparently softened its stand to agree to a 20% share rather than all of Toshiba’s stake. Let’s wait and see.

Other stories

Corporate

Apple Downgraded: Analyst Andy Hargreaves of Pacific Crest thinks it’s not a good idea to further accumulate the shares because he considers Apple’s valuation to be super-rich and the shares likely to be down $10 a year from now. He has therefore lowered the rating to “sector weight.” He also thinks that investors are way too positive on the iPhone 8 and not considering the negatives, such as weaker demand for the more expensive phone or inadequate supply considering the new parts it will be using.

Shareholders Oppose Zuckerberg Chairmanship: According to Proposal Seven in Facebook's proxy statement, there is a call for the board to adopt a policy that the Chairman of the company will be an independent person. The proposal was put forward by consumer watchdog SumOfUs and endorsed by Institutional Shareholder Services (ISS), which says that there are governance issues with the current arrangement where Zuckerberg controls the company as its largest shareholder, CEO and Chairman.

Last year, shareholders approved a new class of shares (Class C) that would give each shareholder a Class C share for each Class A or Class B (10x voting power of Class A held mainly by Facebook executives) share held. Class C shares have no voting rights but will trade publicly and the arrangement will strengthen Zuckerberg’s hold on the company even as he transfers the economist interest of his holdings to a “charitable” company without the need for public disclosure. Creation of the Class C shares was contested later in court and the case will go to trial in September.

Microsoft Realigns Operations: Microsoft (MSFT Quick QuoteMSFT - Free Report) initiated some executive reshuffling. The most important changes were as follows: A new Cloud AI Platform group to be led by Corporate Vice President Joseph Sirosh reporting directly to AI and research head Harry Shum. This business will include Azure Search, Azure Machine Learning, the Microsoft Bot Framework, R Server and the Algorithms and Data Science Solution team.

Corporate Vice President of Azure, Jason Zander will now acquire additional responsibility for SQL Server and other database and data-management jobs in a new Azure + Data Platform Group and will continue to report to Guthrie. Dynamics CRM will be added to a new Business Applications Group headed by James Phillips. The group also includes Power BI, Dynamics ERP family of products, PowerApps, Microsoft Flow, the Azure Portal and SQL Server Reporting and Analysis service.

Google to Open London HO, California R&D Center: Google will build an R&D facility in the Diridon Station area of San Jose, CA where it will employ 15,000 to 20,000 people. It has also in the process of building a huge campus in London, complete with 92,000 sq feet of office space, swimming pool, cafes, gyms, message rooms, parking spaces and a multi-use indoor sports pitch and themed gardens.

Legal/Regulatory

Apple Expands Third Party Repair Capabilities: In the wake of eight states introducing "right to repair" bills, Apple is equipping 400 third-party repair centers in 25 countries with the necessary machinery to do the job. This will reduce customer wait times when a phone is out of order and improve customer satisfaction.

iPhone Data Theft in China: Chinese authorities have found that some 20 Apple/Apple distributor employees and 2 outsiders had sold personal information of Apple consumers like names, phone numbers, Apple IDs and other data for up 50 million yuan. It has been alleged that Apple’s internal computing system was used for the purpose. The people were detained on the basis of a new cyber security law passed by the Chinese government, the details of which are still being ironed out.

Apple consumer data has reportedly been an easy sell in the past as well because of the perception that Apple devices are only purchased by the affluent. But they haven’t been checked by officials because there was no proper law against it. But information theft of important businessmen in the recent past has increased awareness.

German Parents Can’t Access Dead Daughter’s FB Account: The parents of a 15-year old who met her death when hit by a Berlin subway train were denied access to her Facebook account. The mother, who had her log-in details, wanted to access her account because she suspected suicide as a result of bullying. Facebook put the account under “memorial” status when tipped off by a “friend” of the girl’s.

The German court ruled that the mother couldn’t be granted access without the consent of the people the girl communicated with. The decision overturns that of a Berlin court that ruled in favor of the mother on the basis of inheritance law. The court in this case didn’t rule on the inheritance factor but said the privacy law prevented it from ruling in the mother’s favor. Germany’s telecom act originally protected telephonic conversations alone but in 2009, it was amended to include emails as well.

Kaspersky Files Antitrust Complaint Against Microsoft: Leading end point security solutions provider Kaspersky has gone to the European Commission and the German federal cartel office over alleged blockage by Microsoft, which bundles its own security software with Windows. Kaspersky says that Microsoft is creating obstacles for independent software security vendors despite the fact that its own security is not as robust. It blames Microsoft for "a lower level of protection for users, a limitation on their right to choose and financial losses both for users and security solutions manufacturers."

Microsoft says, “Microsoft’s primary objective is to keep customers protected…We are confident that the security features of Windows 10 comply with competition laws. And we will answer any questions regulators may have.”

Alphabet Might Have to Pay $9 Billion EU Fine: Reuters reports that two people familiar with the matter have said that the EU is getting ready to charge a $9 billion fine on Google in lieu of anti-competitive behavior related to its shopping service. In April 2015, the competition commission in the EU accused Google of manipulating search results to favor its own services, in the process hurting both competitors and consumers.

The usual fine in such cases is 10% of the company’s global turnover, which works out to around $9 billion in Google’s case. Google has in the past offered to settle the case but its concessions were unsatisfactory to competitors. It isn’t clear at this stage what restrictions and injunctions the commission will bring against Google and how that will affect its operations.

New Products/Technology

Apple AI Processor Chip: Apple’s semiconductor suppliers have their days numbered it seems. The company, which has been making a number of its own chips, looks set to make even more of these things in-house. One such chip (internally referred to as Neural Engine) will be dedicated for AI functions that will thereby speed up the phone while also helping Siri do your bidding.

Companies like NVIDIA and Google do have dedicated AI chips that do work in the cloud. Apple has preferred to carry out many of these functions on the phone itself on account of privacy concerns. The recent hiring of Qualcomm engineer Esin Terzioglu is adding to speculation about Apple’s chip ambitions with some saying the it might start making the entire SoC in-house.

Andy Rubin Phone: Android creator Andy Rubin is unsatisfied with the way the smartphone market has become what with closed ecosystems, bloatware and pre-installed apps. He’d rather the phone was your personal device for you to load just what you like and little else. So he’s using a stripped-down version of Android that he’s calling Ambient to launch a truly attractive device called the Essential smartphone.

It’s a $699, 5.7-inch device with a tiny bezel, powered by the Qualcomm Snapdragon 835 processor, packing in 4GB of RAM, 128GB of on-device storage, 8 megapixel front-facing camera and 13 megapixel rear camera plus a second monochrome sensor to help boost low-light shots. All of this at less than 185 grams, i.e. 3 grams lighter than the iPhone 7 Plus.

Skeptics abound on the success of the device since it’s a crowded market with Apple, Samsung, Google and a host of Chinese players employing different strategies to protect/grow their shares, effectively pushing out stalwarts like Nokia, Blackberry, Amazon and Microsoft. Essential is also launching a home device, but the smartphone is the main point of attraction.

Skype Redesign: Microsoft has announced a redesign of its mobile Skype app that will include a “Highlights” feature, just like Snapchat “Stories,” i.e. photo and video sharing that will be only temporarily visible. This isn’t very original, but a required change to bring the app on par with the plethora of other messaging services that people use these days. Other additions include bots, emojis, colorful backgrounds and the ability to share content from third-party services. Microsoft would also like to eventually enable live streaming and game playing on a video chat.

Waymo Autonomous Trucks: Alphabet’s Waymo, which has run the greatest number of tests for self-driving cars, is now embarking on a  new project involving self-driving trucks. The company has said that it is relying on its “eight years of experience in building self-driving hardware and software” to conduct “a technical exploration into how our technology can integrate into a truck.” The pre-test run work may actually have been done much earlier since Levandowski, who spirited off Waymo files initially started out with a self-driving trucking company that was then acquired by Uber.

Waymo’s initial tests are being done on a company-owned track in California and will be followed up with rigs. Test vehicles will reportedly be on the road in Arizona later this year. The excitement with trucks is probably related to the dynamics of the trucking market where there is currently a shortage of drivers. But trucking is also trickier in the sense that there are some additional jobs required such as gas filling and ice cutting that may require manual effort. At any rate, competition is heating up with Tesla expected to launch a semi-truck in September that will likely incorporate self-driving technology.

Fleet Management Tool from Google Project Wing: Google’s Project Wing has leveraged Google Maps, Earth, and Street View to create a fleet management software called UTM (UAS Air Traffic Management) that will enable operators of large fleets of unmanned aircraft (drones) to simultaneously carry out various functions without colliding into each other, or other aircraft, or buildings and other obstacles.

The program was run through a series of tests developed by NASA and the FAA at the FAA test site last week. Two Intel Aero Ready-to-Fly Drones for package delivery and a DJI Inspire operated by the Virginia Tech Mid-Atlantic Aviation Partnership (MAAP) for rescue operations were used in the test.

M&A And Collaborations

Intel-DARPA: The U.S. Defense Advanced Research Projects Agency (DARPA) is collaborating with Intel to create a new big data graph analytics platform that it is calling Hierarchical Identify Verify & Exploit (HIVE). The platform will help it handle more complex (many-to-many) relationships in data and help its deployment across many industries by leveraging machine learning and artificial intelligence.

Alphabet Finally Selling Boston Dynamics: To further its goals of acquiring “paradigm-shifting technologies and its vision of catalyzing the next wave of smart robotics", Japanese firm Softbank has agreed to buy robotics companies Boston Dynamics and Schaft from Alphabet for an undisclosed amount. Boston Dynamics was earlier purchased by Alphabet to further its robotics plans.

But Alphabet’s robotics and machine learning technologies differ in process to the one employed by Boston Dynamics, which made the acquisition difficult to integrate. So it has been looking for a suitable buyer for the past year or so. Softbank has been reinventing itself through acquisitions and has even helped create the Vision Fund to increase its involvement with leading edge technologies.

Pandora Still Shopping: Pandora continues to weigh its options in case Sirius XM, which can benefit the most from buying it, doesn’t agree to pay the desired price. On one side it has investment firm KKR agreeing to invest $150 million, or Verizon, offering to invest $100 million, or the two investing in it together. On the other, it has Sirius offering to buy it outright.

Pandora’s growing losses and declining user base aren’t exciting for any buyer, but what investors are interested in is its position in internet-connected cars. Pandora’s agreement with KKR allows it a period to shop for a good price, failing which it will accept the KKR offer. For now, Pandora has extended this period, but if the extension period expires without a sale, the offer will be deemed accepted.

Snap Buys Placed: Snap has acquired Placed, a startup that uses location-based analytics to measure the effectiveness of digital ad campaigns. Its goal is obviously to show that ads running on its social media platform actually generate sales for advertisers. The acquisition should therefore help attract new advertisers, while also encouraging existing clients to spend more on the platform.

Some Numbers

Game Console Sales Poised to Pop: A Jon Peddie Research press release says that consoles are in for a very strong year in 2017 after a couple of years of softness. The report says that sales will jump a whopping 77% this year on the back of new releases like Sony’s 4K PS4, Microsoft’s new Xbox-one (Scorpion) and the recently released Nintendo Switch, which seems to be gaining from pent-up demand.

In the first quarter of 2017, the newly launched Switch took a 19% share, the Wii 27% and the Wii U 3%. Sony remained in leadership position with its PS3 taking a 24% share and PS4 17% share. Microsoft followed with its XB 360 taking an 8% share and XB1 a 2% share.

Alibaba Raises Guidance: Alibaba shares soared last week as the company provided very strong revenue targets for the year. Management expects that ecommerce, cloud, digital media and entertainment, and of course international expansion will contribute to revenue growth of around 45-49%, or over $34 billion this year. Gross merchandise volume (GMV) is also expected to double in the next three years from $547 billion in fiscal 2017 to a trillion dollars by 2020.

Netflix To Spend $6 Billion on Content: CEO Reed Hastings has said that the company intends to spend $6 billion on original content (including payments for original shows) this year. The company has seen something of a controversy over the shows that it streams the same day they hit the theater, but the CEO is optimistic about this changing in the future. At any rate, he feels that content costs would rise with the increase in subscribers and even to hang on to existing ones.

Dell Results: Dell Technologies, which remains a privately held company with a tracking stock in lieu of its EMC (and therefore, VMware) buyout, reported disappointing results for the quarter ended May 5. For the quarter, it generated a net loss of $1.3 billion, or $2.57 a share on revenue of $17.8 billion. The Client Solutions Group, which includes its personal computer division, grew 6% to $9.1 billion while the infrastructure division grew 91.7% to $6.9 billion.

The results are significantly worse than its year-ago performance, when revenue of $12.2 billion and fetched profits of $55 million. But Dell is now saddled with a huge amount of debt that it took on to buy EMC. The results don’t look too impressive all things considered.

Fitbit Drops in Wearables Ranking: Wearable device shipments grew 17.9% to 24.7 million units in the first quarter of 2017, but not all companies could make the most of the increased demand. For the first time this quarter, Xiaomi became the market leader with 14.7% share despite its 3.3% decline in shipments. It was followed closely by Apple, which grew 64.1% for a 14.6% share, mostly at Fitbit’s expense, which declined 37.7% for a 12.3% share.

This was the first time that Fitbit didn’t come out on top. Samsung also grew very strongly at 90.8% for a 5.5% share while Garmin rounded out the top 5, growing 1.6% for a 4.6% share. Other wearables makers grew shipments 43.9%. Fitbit’s inability to expand internationally to faster-growing markets is depressing its growth rate.

Zacks' 2017 IPO Watch List

Before looking into the stocks mentioned above, you may want to get a head start on potential tech IPOs that are popping up on Zacks' radar. Imagine being in the first wave of investors to jump on a company with almost unlimited growth potential? This Special Report gives you the current scoop on 5 that may go public at any time.

One has driven from 0 to a $68 billion valuation in 8 years. Four others are a little less obvious but already show jaw-dropping growth.

Download this IPO Watch List today for free >>