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By Jeremy Glaser and Grady Burkett, CFA | 07-15-2013 11:00 AM

Which Tech Names Can Survive in a Device-Driven World?

Companies that have solid intellectual property and very strong portfolios around software will continue to drive earnings growth and are good long-term holdings, says Morningstar's Grady Burkett.

Jeremy Glaser: For Morningstar, I am Jeremy Glaser. I am here today with Grady Burkett; he is our tech strategist. We're going to talk about the upcoming earnings season and what he expects from the big tech companies. Grady, thanks for joining me.

Grady Burkett: Thanks for having me, Jeremy.

Glaser: So, let's talk a little bit about some of the big trends, and maybe we'll get into some more ideas later. But one of the big things we saw last quarter was this precipitous decline in PC sales. It's looking like that's not kind of a short-term issue. What are you seeing there, and how is it impacting the industry?

Burkett: Right. So, this is our fifth consecutive decline, the second quarter, in PC unit shipments. So PC unit shipments fell 11% year over year in the second quarter. And so, 76 million units were shipped globally by Gartner Research's estimates. It's interesting though when you look at the way this has affected some of the big suppliers that you would think are tied to this; Microsoft, Intel, Hewlett-Packard, those stock prices actually have done very, very well during the last four or five quarters.

So, I think what it's demonstrating is that a lot of the larger suppliers that can shift their portfolios and strategies are actually making those shifts. So, I think the way we're thinking about it on the technology team is PCs matter a lot, and they will continue to matter. But really a lot of these companies are building device strategies, and so really what we have to think about is what's a company's current portfolio and exposures to PC units in that device form factor and how are companies shifting their portfolios to exist in a device world and thrive in a device-driven world.

Glaser: So who do you think has the potential to do that, and who is going to fall behind?

Burkett: Right. So, when we look at it, I think that the companies that have architecture, intellectual property, very strong portfolios around software, and the underlying chip architectures, those are companies that are still going to do well. So, I think Microsoft and Intel, specifically are two companies that will continue to drive earnings growth, continue to succeed in a device-driven world, and I think that those are companies that investors can continue to view as core holdings over the long run.

Obviously, companies that are tied specifically to mobility are going to be pretty well-positioned. So, some of the names like Apple, Qualcomm, those two companies specifically, should do well in this environment.

And a few other companies that are going to be left behind, I would think about manufacturers that don't own a lot of intellectual property and think about the companies that really can't make big transitions. If I think back in the supply chain, I'd be really careful with the hard-drive manufacturers for instance. They have offsets into the data center. But they have so much of their revenue tied to physical hard drives being shipped with individual devices, and that's kind of changing.

So, I would think about, can the company that I own, can it actually drive strategy and drive direction in this market or is it actually being driven. And that's kind of the way I think about it.

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