Can US Tech Survive Trade Wars?

Tech giants Apple and Amazon have shrugged off trade war concerns so far on the way to ever-higher valuations, but risks remain

Brian Colello, CPA 4 October, 2018 | 7:22AM
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Apple iPhone Xs Launch

The Nasdaq index is up more than 15% so far this year, but the US-China trade war adds risk to technology investments. Although companies have not been hit hard by tariffs just yet, we see many tech leaders assessing the current political situation and hoping for a satisfactory outcome.

Apple's (AAPL) popular gadgets, such as the iPhone and Apple Watch, are believed to be exempt from the trade war for now, which we suspect is a relief to the technology supply chain as the vast majority of Apple's devices are assembled in China.

Any tariffs slapped on Apple products could have negative ramifications for dozens of technology stocks under our coverage, as lower demand for iPhones could weigh on revenue from many component suppliers that count on the smartphone titan as a large customer.

In this quarter, both Apple and Amazon (AMZN) became trillion dollar companies and there are others waiting in the wings.

The single most important trend in technology remains the ongoing shift toward cloud computing, as enterprises move their computing workloads to pay-as-you-go business models that lead to greater flexibility, security, and cost savings. The shift has ramifications for dozens of stocks in the sector.

Infrastructure Service Winners

Although the tech sector is overvalued today, we see a couple of undervalued names that are strong beneficiaries of cloud computing. Independent of valuation, we still see winners among infrastructure-as-a-service vendors, such as Web Services, Microsoft (MSFT) Azure, and Google (GOOG). Software-as-a-service vendors are seeing tremendous growth while legacy IT vendors face ongoing headwinds.

We continue to see M&A as a key theme in technology. We see no signs of enterprise software deals slowing, with deals such as Adobe-Magento, Microsoft-GitHub, and Salesforce-MuleSoft occurring in 2018. Adobe-Marketo was also recently rumoured among large-cap software names.

We anticipate more software deals in the years ahead, as leading vendors like Adobe (ADBE), Microsoft, Salesforce (CRM), Oracle (ORCL), Workday (WDAY), and others branch out from their core product lines and tack on adjacent opportunities. Similarly, non-traditional software vendors like Cisco Systems (CSCO) and Amazon may make software-related deals as well, as software is becoming a more important portion of their enterprise offerings.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Adobe Inc476.22 USD1.30Rating
Alphabet Inc Class C156.00 USD-0.21Rating Inc183.32 USD-0.16Rating
Apple Inc169.38 USD-1.92Rating
Cisco Systems Inc47.92 USD-0.66Rating
Microsoft Corp414.58 USD0.23Rating
Oracle Corp120.62 USD0.62Rating
Salesforce Inc277.41 USD1.65Rating

About Author

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

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