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2 Stocks to Watch From the Challenging Computer Industry

The Zacks Computer – Mini Computers industry is suffering from waning demand for consumer PCs. Geopolitical challenges, including persistent inflation and high interest, are major headwinds. Weak demand in China has been a headwind. However, industry participants are benefiting from steady demand for enterprise devices, including laptops, tablets and smartphones. Industry participants like Apple AAPL and HP HPQ are benefiting from these trends. The improving availability of 5G-enabled smartphones has been a key catalyst for industry participants. The launch of foldable and AI and ML-infused smartphones, tablets, wearables and hearables is another major growth driver for the industry participants. Robust demand for production printers, materials and software bodes well for 3-D printing solution providers.

Industry Description

The Zacks Computer – Mini Computers industry comprises companies that offer smartphones, desktops, laptops, printers, wearables and 3-D printers. Such devices are based either on iOS, MacOS, iPadOS, WatchOS, Microsoft Windows, or Google Chrome and Android operating systems. The companies predominantly use processors from Apple, Intel, AMD, Qualcomm, NVIDIA and Samsung. Expanding screen size, better display and enhanced storage capabilities have been the key catalysts driving the rapid proliferation of smartphones. This has been well-supported by faster mobile processors. Laptops, both consumer and commercial, benefit from faster processors, sleek designs and expanded storage facilities. The addition of healthcare features has been driving the demand for wearables.

3 Mini Computer Industry Trends to Watch

Enterprise Adoption Remains Healthy: Strong enterprise demand has been benefiting the industry participants. The growing adoption of a hybrid working environment bodes well for the players, as demand for laptops and tablets is expected to increase. Demand for smart devices that offer facial recognition, retina scans or finger impressions to verify the user for biometrics is gaining traction as enterprises enhance security.

Impressive Form Factor Drives Demand: Expanding screen size, better display and enhanced storage capabilities have been the key catalysts driving the rapid proliferation of smartphones and tablets. This has been well-supported by faster mobile processors from the likes of Qualcomm, NVIDIA, Apple and Samsung. Improved Internet penetration and speed, along with the evolution of mobile apps, have made smartphones indispensable for consumers. Improved graphics quality is making smartphones suitable for playing sophisticated games. This is driving the demand for high-end smartphones and opening up significant opportunities for device makers.

PCs Face Extinction Risk: Personal computers (desktops and laptops), be it Windows or Apple’s MacOS-based ones, have been facing the risk of extinction due to the rapid proliferation of smartphones and tablets. Stiff competition from smartphones has compelled global PC makers to not only upgrade hardware frequently but also add apps and cloud-based services to attract consumers. Nevertheless, the emergence of 5G, AI, machine learning and foldable computers is likely to be the key catalysts in expanding the total addressable market of PCs.

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Zacks Industry Rank Indicates Dim Prospects

The Zacks Computer – Mini Computers industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #222, which places it in the bottom 11% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. Since May 31, 2023, the Zacks Consensus Estimate for this industry’s 2024 earnings has moved down 2%.

Given the dim outlook, there are only a few stocks worth watching in the sector. But before we present those stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags Sector and S&P 500

The Zacks Computer – Mini Computers industry has underperformed the broader Zacks Computer and Technology sector as well as the S&P 500 index over the past year.

The industry has gained 8.2% over this period compared with the S&P 500’s return of 26.3% and the broader sector’s growth of 39%.

One-Year Price Performance

Industry's Current Valuation

On the basis of forward 12-month P/E, which is a commonly used multiple for valuing computer stocks, we see that the industry is currently trading at 26.62X compared with the S&P 500’s 21.19X and the sector’s 26.82X.

Over the last five years, the industry has traded as high as 32.32X and as low as 13.92X, with the median being 24.65X, as the charts below show.

Forward 12-Month Price-to-Earnings (P/E) Ratio

 

 

 

 

 

 

2 Computer Stocks to Watch Right Now

Apple: This Zacks Rank #3 (Hold) company is benefiting from increasing customer engagement in the services segment. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The expanding content portfolio of Apple TV+ and Apple Arcade helped in driving subscriber growth. Apple currently has more than 1 billion paid subscribers across its Services portfolio. The App Store continues to draw the attention of prominent developers worldwide, helping it offer appealing new apps that drive the App Store’s traffic. A growing number of AI-infused apps will attract subscribers to the App Store.

The Zacks Consensus Estimate for fiscal 2024 earnings has increased by 0.5% to $6.57 per share over the past 30 days. The stock has declined 1.4% in the year-to-date period.

Price and Consensus: AAPL

 

HP: This Zacks Rank #3 company’s sustained focus on launching the latest and innovative products is likely to help it stay afloat in the current uncertain macroeconomic environment.

Product innovation and differentiations are the key drivers that have helped HPQ maintain its leading position in the PC and printer markets.

The Zacks Consensus Estimate for fiscal 2024 earnings has been steady at $3.42 per share over the past 30 days. HP shares have gained 3.3% year to date.

Price and Consensus: HPQ

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