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3 Computing Stocks with Promise

·5 min read

These are interesting times for the computing industry, which has had to contend with waning demand for certain categories (like the traditional desktop) in the not-too-distant past. But COVID-19 came along and breathed new life into the market.

With everyone rushing to buy PCs, the surge on the consumer side more than offset the slowdown on the commercial side, as a number of businesses closed offices and/or dealt with rising costs and other disruptions induced by the pandemic. But overall PC sales soared regardless, jumping 13.1% in 2020.

PC sales appear to have peaked in the first quarter of 2021 when they grew 55.9%, before decelerating to a more sedate growth rate of 13.2% in quarter two. Smaller vendors offering unique features or niche designs were a major driver of the growth, which isn’t surprising considering the level of demand.

And that too in a market that is impacted by the global chip shortage. IDC says that the heightened demand coupled with the global chip shortage actually drove some to buy desktops instead of the preferred notebooks.

The outlook from here on out appears mixed, as demand on the commercial side should pick up even as the consumer side slows down after a year of aggressive buying. But customer preferences are still likely to hover around better speed, power, storage and display.

When choosing stocks, the PC market can’t really be considered in isolation because the leading PC makers, in an attempt to diversify beyond the mature PC market, are also trying to build services businesses, while making other consumer devices of varying form factors, including tablets, smartphones, wearables and mobile computing devices of various kinds.

And we now have 5G and AI to add features to these devices, which of course gives people more reason to spend. Particularly those that haven’t lost their jobs (or have been re-instituted) while also being in receipt of stimulus money.

There are 3 computing stocks worth discussing today-

First up is Apple AAPL. The popular supplier of iPhones, iPads, Macs, Watches and a host other products and services (App store, Apple Music, AppleCare, Apple Pay, etc) reported a very strong June quarter with record growth across geographies, double-digit growth in each of its product categories and a continually increasing installed base of active devices (which feeds the services business). The company is also returning a huge amount of cash to investors in the form of share repurchases and dividends.

The Zacks Rank #1 (Strong Buy) stock is expected to grow revenue 33.8% this year (ending September) and 4.2% in the next. Earnings are expected to jump a whopping 70.4% this year. While current expectations are for 1.8% growth in 2022, these estimates are usually raised much higher as we go through each quarter and the outlook becomes clearer.

The surprise history is attractive with an average beat of 23.7% in the last four quarters. In the last quarter, it beat by 30.0%. As a result, estimates for both the September and December quarters are on an upward trajectory. The annual estimate was raised by 41 cents (7.9%). The estimate for 2022 increased 34 cents (6.4%).

#1 ranked HP Inc. HPQ is known for its personal computing and other access devices, imaging and printing products, as well as related technologies, solutions and services that are sold to individual consumers, SMBs and large enterprises, including customers in the government, health and education sectors.

The company is a huge beneficiary of the surge in consumer PCs over the past year and its clout at corporate customers also positions it well for the increasingly hybrid environment this year. It has a target of returning a billion dollars to investors each quarter.

The company is currently expected to grow its revenue and earnings by a respective 9.9% and 63.6% in 2021 (ending October). It’s expected that growth rates will drop off next year although estimates for both years continue to rise as of now (6.6% in 2021 and 7.4% in 2022 since it last reported). It also has a solid estimate surprise history, beating estimates by an average 21.1% in the last four quarters.

Lenovo Group Ltd. LNVGY is the largest PC vendor in the world although, like the others, it also makes other devices. It is known for its Think-branded commercial PCs and Idea-branded consumer PCs, as well as servers, workstations and a family of mobile internet devices, including tablets and smart phones.

The company is very focused on increasing its R&D investments over the next few years to drive the products business. In the meantime, it is seeing continued strength on the services side, as it continues on its journey to becoming primarily a services company. Lenovo is also benefiting from the increased digitization of our lives that has only been exacerbated by the pandemic.

Revenue and earnings of this Zacks Rank #2 (Buy) rated company are expected to grow 14.3% and 71.4% this year before dropping off in the next. The estimates for 2021 and 2022 are up 60 cents (24.5%) and 29 cents (11.5%), respectively in the last 30 days.

However, Lenovo hasn’t had a particularly good recent history in beating estimates (there’s just one analyst providing estimates). So growth rates can actually be weaker than currently expected.

One-Month Price Performance

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