Business neglect of PC upgrades could result in opportunities for investors, top US analyst believes

Written by Ray Clancy

Tuesday, 04 May 2010 11:00

A plethora of aging PCs in the business world could result in a frenzy of buying as global technology updates make upgrades inevitable in a sector that has largely been neglected for a decade, according to analysts.

The technology sector is one that investors should be looking at, according to Jonathan Aldrich-Blake, assistant investment manager of the Americas Equity Fund at Ashburton.

‘Through the downturn it has been a well documented fact there has been a lack of spending on IT as budgets were reigned in and upgrade cycles missed. We have a potential brew of an ageing installed PC base alongside improving economic trends,’ he explained.

‘Historically, upgrade cycles have been linked to improving corporate profits and less tight credit lines, both of which are seeing returns to the business community. Furthermore, the up tick in temporary staffing in the US gives us increased confidence on top of the positive bottoms up data points we are getting,’ he said.

‘One of the more widely known macro drivers is the Windows 7 upgrade. When a new operating system is launched, it instigates a corresponding upgrade of the installed PC base. Newer software requires better specification PC’s. However, with many having missed the previous upgrade cycle, this time around it should be a sizeable event. Furthermore, as Microsoft will cease the support of the Windows XP operating system, it forces the upgrade to Windows 7 for the business community,’ he added.

He believes that the sector has largely been neglected for a decade. ‘Management teams that survived the bubble bursting have learnt the importance of generating cash and having stronger balance sheets. Further, the sector is no longer based on pie-in-the-sky valuations and only trades at a slight premium to the market. Thus, taking into account the growth prospects, this area is potentially undervalued,’ he said.

‘We are still seeing lean inventories across the semiconductor spectrum, which puts to bed the argument that increased production and utilisation rates were purely due to inventory restocking. Any return to normalised inventory levels could drive an additional leg-up in sales at the back end of the supply chain.’

Specifically, he reckons there are shortages in DRAM (computer memory) for the new generation of PC’s, a dynamic that should last for six to 12 months. ‘Consensus data for first quarter earnings forecast 50% earnings growth year on year. If expectations hold true it will be the second consecutive quarter to register profit growth north of 50%,’ he explained.

‘There are some formidable headwinds to tackle. Hand in hand with cloud computing comes virtualisation, reducing the need for infrastructure at all levels. Furthermore, as most of the computing power is farmed out to the clouds, only lower specification PC’s are required for the end user. This teamed with a lower employment base provides an overhang. However, with implementation that will take years to fully install there is still blue sky ahead,’ he concluded.