Apple is a 'best of both worlds' player as IT hardware looks to rebound
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With big-name tech hardware companies lining up to deliver a slate of quarterly results starting this coming week, sentiment regarding the sector remains on the cautious side for the first half of the year.
But, with what might be called a wait-and-see approach toward the market in the near term, feelings are growing that the hardware industry could be on the brink of a gradual turnaound.
That's the impression coming from Morgan Stanley analyst Erik Woodring, who lifted his overall view of the IT hardware sector to in line, which is basically a way of saying "fine", from his earlier cautious rating on the industry. Woodring said he believes the hardware sector is entering the "final innings" of a late, middling cycle before the start of an industry rebound.
"We believe the challenges IT hardware companies are facing in this late cycle environment are well understood by the market," Woodring said, in a research report on the hardware outlook. Woodring added that while he doesn't expect hardware companies' earnings to soon return to levels prior to the start of the COVID-19 pandemic, he estimates that "we're 75% of the way through this cycle's negative earnings revisions" based on historical data.
When it comes to specific hardware companies, Woodring left no doubt about what he considers to be the best of the best: Apple (NASDAQ:AAPL).
Woodring, who has an overweight rating and $175-a-share price target on Apple's (AAPL) stock, called the world's most-valuable company his top IT hardware pick for 2023, and "a rare best of both worlds outperformer".
Woodring said that even Apple (AAPL) "is not fully immune from deteriorating consumer electronics demand," but the company benefits from a position that few others can reach.
"The underlying drivers of Apple's [business] model--a growing installed [customer] base and spend[ing] per user--remain intact," Woodring said. "And that the strength [and] stability of Apple's ecosystem remains undervalued."
However, for as upbeat that Woodring was about Apple (AAPL), he was practically the exact opposite about IBM (IBM).
Woodring, cut his rating on IBM (IBM) to equal-weight, or the equivalent of neutral, from overweight, and trimmed his price target on the company's stock to $148 a share from $152 due to a belief that the company's 'late cycle outperformance has run its course."
According to Woodring, the uncertainty over the macroeconomic situation grows, "we are increasingly more cautious" that IBM (IBM) can sustain is year-over-year revenue growth of between 4% and 6% this year.
Meanwhile, Woodring was more positive about Seagate Technology (STX), as he upgraded the hard-disk drive and storage company to overweight from equal-weight, and boosted his price target on the its stock to $69 a share from $54.
On first look, things have been rough for Seagate (STX) of late, as Woodring said the company "has been challenged by inventory corrections at customers, COVID lockdowns in China and weakening consumer demand. But, Woodring said Seagate's (STX) bread-and-butter products are in line for improving sales among its main customer base.
"We believe now is the time to get more constructive [on Seagate]," Woodring said. "We believe we're nearing [a hard-disk drive] industry bottom and [will] soon move to the early [recovery] cycle period."
For its part, Apple (AAPL) reportedly has begun working on new products as part of an effort to expand more into the market for smarthome devices.