Stay Connected to These 3 Tech Values
The surprisingly big drop in PC shipments during the first quarter is no reason to avoid these undervalued technology-sector firms.
Commentary
The tech world was taken aback this week when a report from the International Data Corporation showed that PC sales plummeted 14% in the first quarter, the largest drop in two decades. The industry had expected sales to be pressured, but the scale of the decrease was somewhat stunning.
There are a number of factors pushing sales lower. One is consumers' continued love affair with smartphones and, increasingly, tablets. There is no need to buy a shiny new laptop or desktop if more of your focus is on your mobile device. PC makers also haven't innovated enough to convince users that it is worth upgrading to newer models.
Intel's (INTC) push to get makers to slim down designs (so-called Ultrabooks) has been greeted with a resounding sigh. Microsoft's (MSFT) attempt to bring together the features of a desktop and tablet operating system in Windows 8 has hardly been a hit either. The new convertible form factors (laptops that convert into tablets) remain a niche product. Even Apple (AAPL), whose PC unit had been growing faster than its peers' for years, now is also seeing a slowdown.
Although this obviously has a big impact on the PC manufacturers such as Dell and Hewlett-Packard (HPQ), as Morningstar's Grady Burkett wrote earlier this week, the quarterly sales decline created shockwaves that were felt through much of the tech industry. Chip suppliers, software companies, and others throughout the entire sector are going to feel the pinch.
But this doesn't mean investors should avoid tech altogether. As with many things in investing, what matters is valuation. These businesses are not in terminal decline, and they will produce plenty of cash flow in the years to come. At the right price, they can make great investments. In some cases today, the market has priced in a too-pessimistic long-term outlook. Some of the woes we currently see are being caused by a combination of a weak global economic environment and where we are in the product cycle. We give many of these firms wide or narrow economic moat ratings because we think that they will be able to overcome these short-term problems and fend off upstart competitors. Patient investors can be rewarded.
We used Morningstar's Premium Stock Screener to find these good long-term bets. We searched for wide- or narrow-moat tech firms with current Morningstar Ratings for stocks of 4 or 5 stars. You can run the screen for yourself here. Below are three names that passed.
F5 Networks (FFIV)
From the Premium Analyst Report:
During the last five years, F5 Networks' differentiated approach to network traffic management has allowed it to steadily gain share from much larger rival Cisco Systems (CSCO) in the rapidly growing application delivery controller, or ADC, market. We think F5's technological lead and the proven value of its products to customers positions the company for ongoing success for years to come, despite increasing competition over time.
Intel (INTC)
From the Premium Analyst Report:
Intel is the dominant force in the roughly $30 billion computer processor market. It has benefited tremendously from the proliferation of personal computers in the past few decades. Intel has long held the lead in microprocessor technology and performance, while Advanced Micro Devices (AMD) has mostly been an also-ran. While there have been rising fears that Intel may have trouble competing with emerging processor design firm ARM Holdings , we believe this has been blown out of proportion.
ATMI
From the Premium Analyst Report:
ATMI is a top supplier of materials and consumables used during chip fabrication and will benefit from continued advances in semiconductor technologies. The firm has been investing in opportunities that should drive growth down the road.
All data as of April 11, 2013.