Tech & Telecoms: Opportunities in Apple and Microsoft

While the tech sector looks fairly valued, there may be opportunities in smartphone and cloud software-related providers

Brian Colello, CPA 1 July, 2016 | 10:44AM
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Firms with exposure to the smartphone market have faced some tough times in recent quarters, as Apple (AAPL) iPhone demand has not lived up to prior expectations and the company reported its first year-over-year quarterly revenue decline since 2003.

Meanwhile, the rest of the smartphone market hasn't fared much better; we've seen some company-specific market share shifts across the Android ecosystem, but in total, smartphone unit sales will fail to achieve double-digit growth in 2016 for the first time this decade. In turn, a host of components suppliers have sold off accordingly.

Despite this near-term sluggishness, we remain confident that the strong secular shift away from feature phones and toward more advanced smartphones is still intact. Although we no longer foresee exponential iPhone growth for Apple, we think that customer switching costs will drive most iPhone customers today to buy future iPhones tomorrow, thus supporting the company's unmatched free cash flow generation.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Adobe Inc618.28 USD-0.41Rating
Apple Inc146.77 USD-1.49Rating
Microsoft Corp286.54 USD-0.87Rating
Oracle Corp87.80 USD-0.07Rating

About Author

Brian Colello, CPA  is a senior stock analyst with Morningstar.

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