This is the year to bet on atoms over bits. For most of 2020, investors went ga-ga for cloud computing, bidding up shares of any company supporting the adoption of remote work, learning, and shopping— Zoom (ticker: ZM), Chegg (CHGG), and Shopify (SHOP)—or helping companies move to the cloud— Snowflake (SNOW), DocuSign (DOCU), and Okta (OKTA).
But those stocks have sagged in 2021, as tech investors rotated to cheaper bets with exposure to an expanding economy and accelerating corporate IT spending. There is growing evidence of companies boosting their outlays for PCs, servers, disk drives, and other tech goods. And while hardware stocks are already trouncing the broader market this year, there’s reason to think that earnings estimates for them are lagging and that the stocks are still cheap.
So, time to go long atoms.
Morgan Stanley hardware analyst Katy Huberty was on this idea six months ago. Last October, she turned bullish on hardware. Last week, she doubled-down on the idea, raising her estimates and target prices across the group. A new Morgan Stanley survey of chief information officers has convinced Huberty that the outlook is even better than she had thought.
As it happens, Barron’s hosted an in-depth interview with Huberty last week on a new monthly video interview series I’m hosting called Tech Trader on Barron’s Live. In that discussion, which came a couple of days ahead of her bullish update late last week, Huberty laid out the case for the group, and walked through some of her favorite picks. The highlights:
Still bullish on PCs: Huberty thinks the robust personal computer growth that emerged during the pandemic has legs.
“I’m not a believer in the Covid bump,” she told me. “I think there’s been a Covid reset to higher demand.” She notes that in the U.S., the average household owns only 1.2 PCs. “When you think about one or two people working from home, and one or two kids learning from home, 1.2 PCs isn’t going to cut it.” She also says that more consumers are shifting from desktops to notebook computers, which have a faster replacement cycle. There’s also strong demand in emerging markets, she says. In China, only 12% of K-12 students have access to a PC at home.
Meanwhile, any slowdown in consumer demand could be offset in the enterprise as IT spending bounces back. She points out that most companies haven’t refreshed their PCs in the past year.
“What we’re hearing from CIOs is that they are thinking of the PC as an employee satisfaction driver,” she says. “I think of it as, ‘How are we going to get people back in the office? We’re going to make sure they have an advanced, updated workstation, with all the peripherals they need to still work in a hybrid work environment.’”
Huberty has Overweight ratings on both Dell Technologies (DELL) and HP Inc. (HPQ). Both stocks also are benefiting from non-operating factors.
For HP, it’s an aggressive stock repurchase program—at least $1 billion a quarter, or an expected 20% of the outstanding shares over two years.
For Dell, it’s the value that could be unlocked from a spinoff of the company’s majority stake in VMware, an idea Dell is considering. Huberty upped her target on Dell last week to $107, from $96. But she thinks the stock in a VMware spin scenario could be worth $133 a share—a potential gain of about 50%.
Reopening bet: Huberty remains bullish on NCR (NCR), the 137-year-old provider of retail sales systems and automated teller machines. She thinks NCR will benefit from pent-up demand as more retailers and restaurants resume normal operations. She also sees a higher minimum wage driving demand for self-checkout systems, which come at 10 times the price of traditional cash registers. As for ATMs, Huberty notes that banks are closing branches and replacing them with versatile ATMs that can do things like complete loan applications via video links to remote bankers.
The cloud’s hardware: Huberty is bullish on hard-disk drive maker Seagate Technology (STX). Thanks to a multidecade period of consolidation, Seagate is the only remaining pure play on hard drives; its rival Western Digital (WDC) has evolved into a flash-memory business, as noted in last week’s column. As I’ve observed before, the cloud isn’t made of water droplets; most of it consists of data on hard drives. Huberty sees Seagate as a direct beneficiary of higher IT spending.
Sticking with Apple: Huberty remains one of the Street’s most enthusiastic Apple (AAPL) analysts. She thinks investors have become too cautious on iPhone sales, and she sees 20% upside for the stock. The iPhone replacement cycle reached four years during the pandemic, well above historical trends, she notes.
Huberty also remains bullish on Apple’s services business. Last week, she lifted her 2021 and 2022 revenue estimates based on a likely boost to search revenue from Google as online ads recover. She also sees another strong year ahead for Macs, iPads, and wearables. And she thinks the odds are better than 50/50 that Apple will be making cars five years from now. Cars, of course, are rich with atoms.
Write to Eric J. Savitz at [email protected]
