Technology: A couple of hurdles, but tech stocks keep going

<pre><pre>Technology: A couple of hurdles, but tech stocks keep going

Technology stocks remained on fire in 2019 and recovered from their lows at the beginning of the year. The Morningstar US Technology Index rose 47% as of December 31, outperforming the U.S. equity market, which gained 31% versus 2019 (Figure 1). The technology returned in early 2019 with some optimism that the U.S. and China could conclude trade deals and avoid a full-blown trade war. As a result, the markets and technology sector declined in the fourth quarter of 2018. In the second quarter of 2019, ugly minds again appeared, particularly as a result of the US ban on sales for Huawei, a major manufacturer of smartphones and network devices.

After an upswing in May, Tech outperformed the broader market. – Source: Morgenstern

However, the market removed these concerns in the second half of 2019 and developed significantly better than the broader market. Huawei has not proven to be a major headwind for growth, while Apple iPhone sales, in which not only Apple, but dozens of vendors, are ahead, seem to be on the rise. Our ratings for 2019 as a whole assume that a trade war between the U.S. and China will eventually subside, and with the rally in U.S. technology in the second half of 2019, the market appears to be settling.

We believe the median of US technology stocks is overvalued by 11% and we don't see any sub-sectors where the median is attractively valued. Semiconductors seem to have the least chance today as this sector has recovered significantly since the beginning of 2019, when pessimism between the U.S. and China was at its highest. Software also seems largely overrated to us. Again, we attribute the lack of attractive US technology stocks to less pessimism about trade tensions (Figure 2).

Tech is now largely overvalued after a strong year in 2019. – Source: Morningstar

When looking at technology trends in the United States, cybersecurity is at the forefront for corporate and government decision-makers. Why? Because several hundred records were stolen in the time it took to read this paragraph. The cybersecurity providers we cover have become economic trenches by becoming the lifeblood of customers, and we believe that the potential disruption associated with switching from these providers is not worth the risk. We expect the $ 100 billion cyber security market to grow 9% over five years (Figure 3). We expect certain areas, such as security for cloud-based workloads and applications, and automation solutions to outperform traditional offerings. In short, IT managers are exposed to too many warnings and don't have enough time to check them all (Figure 4).

Cyber ​​security spending is expected to increase by 9% CAGR by 2023. – Source: Morningstar

IT managers are exposed to many cyber security requirements to review. – Source: Morgenstern

Best selection

Intel (INTC)
Economic ditch: wide
Fair value estimate: $ 65
Fair value uncertainty: medium

Wide-Moat Intel is trading at an attractive discount to our fair value estimate of $ 65 per share. Chiptitan's extensive product portfolio, which is tailored from the data center to the edge for computers, gives us confidence in the long-term growth prospects of the company, despite a declining PC market. We welcome Intel's Scattershot approach to addressing computing (Artificial Intelligence and Cloud), connectivity (5G) and storage (3D NAND and 3D XPoint) challenges. The acquisitions (Altera, Mobileye, Nervana and Movidius) have unlocked new growth factors for Intel and at the same time expanded the capabilities of the old guard in the area of ​​client computing and data center.

Palo Alto Networks (PANW)
Economic ditch: narrow
Fair value estimate: $ 305
Fair value uncertainty: high

Narrow-moat Palo Alto Networks became the market leader for firewalls in 2018. We assume that the company will be able to match its growth rate as it expands its portfolio in high-growth areas for cloud-based cybersecurity, analytics and automation. The complexity of managing a variety of products from different software and hardware vendors, as well as a lack of cybersecurity talent, suggest that companies and government agencies are demanding consolidated security platforms. We believe the Palo Alto security platform is at the forefront and will continue to be in demand as customers want to expand existing Palo Alto subscriptions.

VMware (VMW)
Economic ditch: narrow
Fair value estimate: $ 202
Fair value uncertainty: high

We believe that VMware's position as a commonality between public clouds, private clouds and on-premises ecosystems offers an enviable position. Combined with VMware as a pioneer in deploying and using applications in any network environment, we expect this software giant to achieve double-digit revenue growth. The shares declined due to weak short-term sales, concerns about more general IT spending, and recent major acquisitions from VMware. However, this decline overlooks VMware's thoughtful strategic changes to hybrid clouds and containerized applications.