AAPL, GOOG Grab Profits in ‘Disruptive Mobility,’ Says Barclays; Beware ‘Capital Strike’
By Tiernan Ray
Ben Reitzes with Barclays Capital, along with colleagues from different businesses, today offered up a mammoth (151 pages) report on what he claims is “disruptive mobility, changing the face of tech,” in which he claims the winners will be a gaggle of companies that will benefit from “a trend toward ultra-mobility and apps so powerful that it is remaking the technology sector.”
As you’d imagine, from Reitzes’s report earlier this week cutting the outlook for personal computers, the change is all about more people buying smartphones and tablet computers, and getting more work done with cloud computing facilities, and all the infrastructure changes that go with that:
A new generation of consumers and IT workers are figuring out how to compute differently than PC users of the 90s – relying more on mobile devices and the cloud – as PCs and other devices are seeing significant task infringement. As a result, we argue that the PC replacement cycle is being elongated by another 1-2 years, resulting in the loss of 50-100 million units in annualized demand by PCs is not the only subsector impacted in tech as printing is also caught in the wake of mobility. Disruptive mobility also has the ability to alter trends across semiconductors, payments, electronic components, enterprise hardware, software and more. For example, with more tasks being done on mobile devices, more storage and computing capabilities need to move into the cloud – changing corporate behavior (trust in the cloud will change too). There are ramifications in terms of networking traffic and where storage capacity is allocated in organizations and how security is used. Wireless networks will need to be upgraded continuously, but there is also an increased need for WiFi given bandwidth limitations and overall capacity needs.
The long list of winners across industries compiled by Reitzes and the team include Apple (AAPL), EMC (EMC), ARM Holdings (ARMH), Mellanox (MLNX), Radware (RDWR), Ceva (CEVA), Nice Systems (NICE), LG Electronics (066570KS), Samsung Electronics (005930KS), NetSuite (N), Splunk (SPLK), Teradata (TDC), ATOSS Software AG (AOF), Temenos Group (TEMN), Google (GOOG), Priceline (PCLN), Visa (V), Corelogic (CLGX), HCL Technology (), Broadcom (BRCM), Cavium (CAVM), NXP Semiconductor (), MediaTek (2454TW), Canon (7751JP), Hitachi High Technologies (8036JP), Lam Research (LRCX), Qualcomm (QCOM), Cisco Systems (CSCO), Largan Precision (3008TW), ZTE (0763HK), SBA Communications (SBAC), and Liberty Global (LBTYA).
Because the operating system software environments are in Reitzes’s view the heart of the shift, he and the others see Apple and Google continuing to take the lion’s share of profit for some time:
In our pool of selected large-cap tech companies, we see a significant increase in the share of tech income belonging to Google and Apple. Google and Apple’s share of combined selected large-cap IT profits has expanded from a little over 16% in 2007 to over 40% in September 2012. We expect this trend to continue at the expense of former leaders such as Dell, Hewlett- Packard, Xerox and Intel. While not included in this chart – we believe that others that are closely aligned with the guts of disruptive mobility such as QUALCOMM and MediaTek will also be able to expand their level of profits at the expense of PC-related semi players.
Aside from Apple and Google grabbing an increasing amount of profit in this new world — a long term trend he doesn’t see reverting anytime soon — Reitzes sees spending on IT at the moment being victim to a “capital strike” as companies hold of while they await the fiscal cliff:
Earnings reports highlighted incremental U.S. weakness, underscoring the cautious capital spending environment and showing that weak demand and uncertainty around the U.S. elections and tax cliff have manifested in capital spending, which is particularly damaging to the Technology sector. We expected soft capital spending in 2012, due to public policy uncertainty, but were surprised with weak tech spending in 1Q12 reporting season. 3Q12 earnings reports from the Technology and Industrials sectors were particularly weak as weak global demand, in addition to the U.S. elections and tax cliff uncertainty led to weak capital spending, which we don’t think was anticipated given S&P 500 revenue beats were the weakest since 3Q09. On balance the economy looks similar to our Truman’s Third Term scenario: housing is improving, consumption is stable but the business sector has weakened. While we see catalysts for a significant drop in public policy certainty that would boost business confidence and end the capital strike, we believe a market correction is required to force the hands of politicians to reach an agreement on the tax cliff.
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