S&P Information Technology Sector
Alex Rickels l Douglas Burke
July 8th , 2015
Market Cap Weightings
S&P 500
Telecommunication
Services, 2.24%
Utilities,
Materials,2.84%
3.19%
Information
Technology,
20.00%
Energy,
7.86%
Dividend
Receivable
s, 0.00%
Consumer
Staples,
9.27%
Financials,
16.62%
Industrials,
10.27%
Consumer
Discretiona
ry, 12.59%
Source: Bloomberg
Health
Care,
15.10%
SIM
Utilities,
2.91%
Materials,
2.66%
Telecommunicati
on Services,…
Cash,
1.61%
Energy,
7.65%
Information
Technology,
20.55%
Dividend
Receivable
s, 0.06%
Consumer
Staples,
8.86%
Industrials,
7.97%
Financials,
19.45%
Consumer
Discretiona
ry, 8.47%
Health Care, 14.88%
Source: SIM April 2015 Monthly Appraisal
Industry Classification
Information
Technology
Software &
Services
Technology
Hardware &
Equipment
Internet Software &
Services
Communications
Equipment
IT Services
Technology
Hardware,
Storage, &
Peripherals
Software
Electronic
Equipment,
Instruments, &
Components
Semiconductors &
Semiconductor
Equipment
Representative Companies
•
Internet Software & Services
• Google, eBay, Facebook, Equinox, VeriSign
•
IT Services
• Vantiv, IBM, MasterCard, Accenture, Automatic Data Processing
•
Software
• Activision, Microsoft, Oracle, Salesforce.com, Adobe Systems
•
Communications Equipment
• Qualcomm, Cisco, Motorola Solutions
•
Technology Hardware, Storage, & Peripherals
• Apple, EMC, HP, Western Digital, Seagate, SanDisk
•
Electronic Equipment, Instruments, & Components
• Corning, TE Connectivity, Amphenol, FLIR System
•
Semiconductors & Semiconductor Equipment
• Intel, Texas Instruments, Broadcom
Correlation Between Industry Groups
Software & Services
Technology Hardware
& Equipment
Software & Services
Technology Hardware &
Equipment
0.96
Semiconductors &
Semiconductor
Equipment
0.81
0.77
Semiconductors &
Semiconductor
Equipment
Top Companies within the IT Sector
Name
Apple Inc
Google Inc
Microsoft Corp
Facebook Inc
Oracle Corp
Other
S&P IT Sector
Sub-Sector
Software & Services
IT Hardware
Semiconductors
S&P IT Sector
Market Cap
$730.2B
$369.6B
$366.1B
$247.2B
$177.7B
$3,914.3B
% Market Cap
17%
9%
9%
6%
5%
53%
100%
Market Cap
$2,201.3B
$1,259.6B
$453.4B
$3,914.3B
% Market Cap
56%
32%
12%
100%
S&P 500 versus S&P IT Sector
The S&P Information Technology Sector grew 29% more than the broader S&P 500 over the last
10 years.
Best/Worst Stocks since 2010
Best/Worst Stocks This Past Year
Business Analysis
Demand
• Future Demand
• Global expansion (emerging markets, etc.)
• Cloud Computing
• Internet of Things
• M&A Activity
• Moderately cyclical
• Business: Capital expenditures affected by downturns
• Personal: Info Tech treated as discretionary items
Lifecycle
Profitability Outlook: Porter’s Five Forces
• Network Effects (e.g. MS
Windows, Facebook)
• Capital Investment (e.g.
Broadcom)
• Strong Brands (e.g.
Apple)
• Government Regulation
• Low switching costs
(relative to late
1990s / early 2000s)
• Powerful large
buyers
Barriers to
Entry
Buyers
Rivals
• Disruptive innovations
• Desktops  Laptops 
Netbooks  Tablets
Substitutes
Suppliers
• Threat to vertically
integrate (e.g.
Google servers)
• Brand name (e.g.
Intel)
Porter’s Five Forces Analysis (Cont’d)
Industry
Internet Software &
Services
IT Hardware &
Equipment
Semiconductor &
Semiconductor
Equipment
Barriers
to entry
Threat of
Substitutes
Buyer
Power
Supplier
Power
Rivalry
Varies
High
Medium
Low
High
Medium
High
High
Medium
High
High
Medium
High
Low
Medium
Economic Analysis
Information Technology VS U.S. GDP
Information Technology VS Total IT Spending
Information Technology VS Personal Consumption of IT
Future Tech Spending Index
CPI for Technology
Tech Pulse Index
Financial Analysis
IT Sector Performance
IT Sector: Gross Margins
70%
65%
60%
55%
50%
45%
40%
35%
30%
'05
'06
S&P IT Sector
'07
S&P 500
'08
'09
'10
Internet Software & Services
'11
'12
IT Hardware
'13
'14
Semiconductors
IT Sector: Operating Margins
30%
25%
20%
15%
10%
5%
0%
'05
S&P INFT
'06
'07
S&P 500
'08
'09
'10
Internet Software & Services
'11
'12
IT Hardware
'13
'14
Semiconductors
IT Sector: Profit Margins
25%
20%
15%
10%
5%
0%
'05
S&P INFT
'06
'07
S&P 500
'08
'09
'10
Internet Software & Services
'11
'12
IT Hardware
'13
'14
Semiconductors
IT Sector: ROE
35%
30%
25%
20%
15%
10%
5%
0%
'05
'06
S&P INFT
'07
'08
S&P 500
'09
'10
'11
'12
Internet Software & Services
'13
'14
IT Hardware
'15E
'16E
'17E
Semiconductors
Valuation Analysis
IT Sector: P/E
40
35
30
25
20
15
10
'05
'06
S&P IT Sector
'07
'08
S&P 500
'09
'10
'11
'12
Internet Software & Services
'13
'14
IT Hardware
'15E
'16E
'17E
Semiconductors
IT Sector: P/S
5
4
4
3
3
2
2
1
1
-
'05
'06
S&P INFT
'07
'08
S&P 500
'09
'10
'11
'12
Internet Software & Services
'13
'14
IT Hardware
'15E
'16E
'17E
Semiconductors
IT Sector: P/B
6
5
4
3
2
1
'05
'06
S&P INFT
'07
'08
S&P 500
'09
'10
'11
'12
Internet Software & Services
'13
'14
IT Hardware
'15E
'16E
'17E
Semiconductors
IT Sector: Dividend Yields
4%
3%
3%
2%
2%
1%
1%
0%
'05
'06
S&P INFT
'07
'08
S&P 500
'09
'10
'11
'12
Internet Software & Services
'13
'14
IT Hardware
'15E
'16E
'17E
Semiconductors
10-Year Absolute and Relative Metrics for IT Sector
Absolute Basis
High
P/E
26.78
10.79
Average
18.75
P/B
5.01
2.29
3.69
4.26
P/S
3.36
1.05
2.36
3.36
15.88
6.45
11.15
12.05
EV/EBITDA
Relative to S&P
500
Low
High
Low
Average
Current
19.54
Current
P/E
1.55
0.89
1.14
1.04
P/B
1.79
1.31
1.53
1.46
P/S
2.16
0.81
1.75
1.78
EV/EBITDA
2.31
1.06
1.57
1.17
Recommendation
Recommendation
• Even-weight
1. Currently 20.55%, Recommend 20.00%
2. Purchase Company in Semiconductor Space
• Lower correlation with other IT sub-sectors
• No exposure
• Big decline in the area recently
Benefits of the Sector
• Innovation
• Growth Potential
• Big Trends
1.
2.
3.
4.
Cloud Computing
Internet of Things
Security
Big Data
Concerns in the Sector
• Business lifecycle is unfavorable for IT Sector
• Overall economy slowing in the near-term
• Q1 and Q2 results have yielded below consensus
estimates
• P/E near historical average
• Many of portfolio stocks are reaching fair value
Questions?