17.01.2013

Brief Analysis by Monika Rosen, Chief Analyst at Bank Austria Private Banking:
US tech sector faces structural changes

  • Earnings dynamics for the US tech sector weaken again for the first time since 2009
  • Classic PC business is being crowded out more and more by tablets, but even Apple is also feeling the pressure, due to the lack of product innovation

The US tech sector has been in the news more frequently recently, and not all of the headlines have been positive. One issue is that the current quarterly reports from tech sector companies reflect weaker earnings dynamics than the broader market, for the first time since 2009. Whilst the S&P is expected to show earnings growth of 1.8% for Q4 2012, estimates for the tech sector are pointing to a decline of 1.1% in earnings.

Another of the main worries is the PC business. The current crises – such as the US fiscal cliff and the Eurozone debt crisis – have brought IT budgets at many companies under pressure. At the same time, users are clearly gravitating more and more towards tablet computers, which is causing revenues from classic PCs to shrink. The fourth quarter is traditionally the strongest period for the tech sector, but last year PC sales contracted by 5%, and sector analysts believe that the trend away from classic PCs towards tablets is irreversible.

The company Dell provides an excellent example of these developments. Just like other PC manufacturers, there has been strong pressure on Dell's share prices. Recently, however, there was a vigorous rally for Dell, thanks to speculation about the company withdrawing from the stock market or being taken over by private equity firms. Dell generates the bulk of its revenues with PCs and is thus dependent on a business that is no longer expected to grow in the foreseeable future. As a result, there has been more and more speculation about a possible withdrawal from the stock exchange. One major obstacle to such a move, however, could be Dell's size. Following the latest increases in share prices, Dell's market capitalisation amounts to almost USD 23 billion. If one factors in a certain amount of premium, this would mean that private equity funds would have to invest around USD 25 billion. This could prove to be too much, even for the big players in this business.

Another former favourite in the tech sector is also struggling with weaker popularity these days: Apple. The stock price is now down by around 30% from the all-time high of USD 700 in September 2012. Clearly, investors are now more sceptical, since the company has not been able to roll out any real product innovation for quite a while and in light of the recently weaker demand for the iPhone 5.

Last but not least, it remains to be seen how far the increases for Facebook will go. The share price has bounced back strongly from its low of USD 17 per share, but the company is still trading below the issue price of USD 38. It is reported that many investors are really just waiting to be able to exit their original investment with as small a loss as possible. Consequently, there may be more selling pressure when the share price begins to approach the USD 38 mark.

Summary: There has been quite mixed news from the tech sector in the recent past, and earnings performance in the final quarter of 2012 was probably sub-average. This could quite easily lead to some uncertainty for the market as a whole, in light of the fact that technology is the largest sector in the S&P, accounting for a share of almost 20%. Nevertheless, we do not expect that the underperformance by the tech sector will last for too long. On the other hand, we do believe that a structural change is underway in the sector and that the traditional PC business will certainly end up as one of the losers from this.

Enquiries: Monika Rosen
Chief Analyst at Bank Austria Private Banking
 Tel. +43 (0) 50505 - 40104
  E-Mail: monika.rosen@unicreditgroup.at

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