[ad_1]
After several years of market underperformance, the technology sector is now a drag on the US equity market. Megacap Technology Stocks (Appl (AAPL) Microsoft (MSFT) ) are still holding up relatively well, while we continue to see a sell-off in the rest of the tech investment landscape. We are optimistic about secular trends in technology, such as cloud computing and increased demand for semiconductors.
However, a softer macroeconomic environment and stronger US dollar are creating some headwinds. In particular, we see demand for PCs and low-end smartphones moving into such devices, weighing on both hardware companies and suppliers of processors, graphics cards and memory chips. However, for long-term patient investors, we still recommend high-quality names in software and parts.
As of September 27, the Morningstar US Technology Index is down 24% on a TTM basis, a sharp reversal from the +33% TTM performance nine months ago. The US equity market is down 19% on a TTM basis. Over the past quarter, both tech and the U.S. equity market are down about 3% each.
In the year As of Sept. 27, the U.S. tech sector was down 22%, a gain from a sector that was fully valued at more than 14% a year ago. Software remains the most attractive technology subsector as the median stock is 28% undervalued. However, the semiconductor stock is 26% undervalued, and we see more buying opportunities for investors this quarter. The average hardware inventory is 25% lower priced.
Source: Morningstar Equity Research, data as of September 27, 2022.
Technology Selloff is overrated in software.
In software, IT departments are focused on digital transformation, first from the secular shift to cloud computing and software as a service or SaaS, followed by the coronavirus pandemic and the critical rush to implement remote work tools. We observe that enterprises use software to modernize all kinds of business processes, resulting in software industry growth at a low double-digit CAGR. We see the role of electronic components such as sensors, connectors and electrical resistors as underappreciated. We think these mission-critical electronic components are the result of strong engineering development by their suppliers. They ensure the flawless performance of the planes, trains and automobiles we rely on every day – delivering strong switching costs and commanding pricing power. Electrification of the automotive market is an increasingly important development theme for these suppliers.
Source: Gartner Morningstar data as of June 27, 2022.
Top choices
sales force (CRM)
Star rating: ★★★★★
Economic Moat Level: Broad
Actual price estimate: $240
Fair value uncertainty: Moderate
We believe Salesforce.com represents one of the best long-term growth stories in large-scale software thanks to its ever-expanding portfolio of complementary solutions that enable users to fully embrace their customers, build relationships, strengthen retention and grow revenue. In our view, Salesforce will benefit the most from natural cross-selling between the cloud, selling stronger features across product lines, pricing initiatives, global growth and acquisitions like the recent Slack and Tableau deals.
Now service (right now)
Star rating: ★★★★★
Economic Moat Level: Broad
Actual price estimate: $675
Fair value uncertainty: Moderate
ServiceNow excels at executing on the ground and expanding strategy, and continues to leverage its strengths in workflow automation to penetrate deeply and broadly across IT with HR, customer service specialty, and other back office products. We expect both tiered offerings and vertical specialty versions to continue to provide a good tailwind to earnings. As seen in retention statistics, we think ServiceNow has become a key partner in digital transformation that remains at the cutting edge. Importantly, we are impressed by ServiceNow’s excellent balance between strong and highly visible revenue growth and solid margins.
ASML container (ASML)
Star rating: ★★★★★
Economic Moat Level: Broad
Actual price estimate: $696
Fair value uncertainty: Moderate
ASML is one of our top picks in the semiconductor space, as the growing use of ultra-violet lithography supports explosive chip demand from major chipmakers such as TSMC and Intel. Although the company’s first quarter outlook was negatively impacted by supply chain constraints, we think ASML will outperform the wafer fab equipment industry in 2022. With TSMC, Intel and Samsung all vying for leadership in process technology, we expect ASML to be a primary user. It will be sold to all three chipmakers’ devices.
[ad_2]
Source link
