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Cloud Is the New Engine of Growth

Companies that keep people connected to their devices will succeed.

Basili Alukos, CPA, CFA, 12/17/2013

The computing shift from the client/server model to a device/cloud model has led to an obvious disruption of the global PC industry, which should lead to long-run declines in unit sales. But the implications of this new era are much broader. The physical location of processing and applications has swung from being distributed across servers and PCs to central locations in the cloud. Morningstar’s equity analysts believe that technology companies that provide scalable and flexible solutions that are cross-platform and support multiple Internet-connected devices have the highest likelihood of success. And ironically, “old-tech” companies such as Oracle ORCL and Intel INTC have been able to protect their moats by embracing this new strategy.

To find out how investors can take advantage of this paradigm shift in the tech business, I sat down with a team of analysts who cover the sector and contribute to Morningstar’s Technology Observer newsletter. Our discussion took place Oct. 15.

Basili Alukos: What’s the most important aspect investors should be aware of in the tech sector today?

Grady Burkett: It’s important for investors in the technology sector to delineate between the consumer technology segment and the enterprise or business technology segment. On the consumer side, we have rapid product cycles and changing consumer behaviors. Consumers are less interested in security and reliability and more interested in features and having the latest, greatest hardware. On the enterprise side, hardware is supporting mission-critical applications. There are security concerns. There’s significant process involved. So, you’ll see customers’ switching costs lower for consumers than it is for enterprise customers. That leads to fewer economic moats for hardware vendors that are in the consumer segment than those in the enterprise segment.

Alukos: What about brands? There are some powerful ones on the consumer side.

Brian Colello: Brand in tech is fleeting. Companies like Apple AAPL have a terrific brand today, but all it takes is one flop, or a series of flops, to diminish that brand.

Alukos: How do you see the smartphone space shaping up?

Colello: We think there’s room for two ecosystems, Apple’s iOS and Android. There’s certainly a fight for third between Windows and Blackberry, but Windows certainly will win that out. Blackberry just simply doesn’t have the other assets to compete in the space.

Basili Alukos, CPA, CFA, is a stock analyst with Morningstar.

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