INFORMATION
TECHNOLOGY
SECTOR PRESENTATION
Siddharth Agrawal
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Alex Fullerton
Autumn Semester 2014
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May Lim
Professor Royce West
OVERVIEW
Sector Weightage
YTD QTD S&P 500 9.90% 1.13% Tech 15.66% 4.76% S&P500 SIM Utilities, 1.93% Telecommunica
tion Services, 2.36% Utilities, 2.98% Materials, 3.50% Telecommunica
tion Services, 2.50% Consumer Discretionary, 11.98% Consumer Staples, 9.41% Information Technology, 19.44% Dividend Receivables, 0.08% Materials, 2.91% Consumer Discretionary, 10.94% Consumer Staples, 9.58% Information Technology, 21.54% Energy, 9.01% Energy, 10.32% Industrials, 10.35% Cash, 0.89% Industrials, 6.93% Health Care, 13.57% Financials, 16.09% Health Care, 13.67% Financials, 18.75% Source: SIM September 2014 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 Semiconductors & Semiconductor Equipment Source: Global Industry Classification Standard (GICS)
Representative Companies
•  Internet Software & Services ▫  Yahoo, Twitter, LinkedIn, Facebook, eBay, Google •  IT Services ▫  Xerox, Vantiv, Visa, Mastercard •  Software ▫  Symantec, Oracle, Microsoft, Adobe •  Communications Equipment ▫  Qualcomm, Motorola, Cisco •  Technology Hardware, Storage & Peripherals ▫  SanDisk, Western Digital, HP, EMC, Apple •  Electronic Equipment, Instruments & Components ▫  Molex Inc, Vishay Precision Group •  Semiconductors & Semiconductor Equipment ▫  Intel, Micron
Source: Bloomberg
Performance by Market Cap
Industry Group Software & Services Technology Hardware & Equipment Semiconductor Total Information Technology Companies Apple Inc Microsoft Corp Google Inc Alibaba Group Facebook Inc IBM Oracle Corp Intel Corp Samsung Electronics $ Trillion 3.94 2.56 1.03 7.53 $ Billion 584.84 359.51 349.42 220.92 196.53 181.61 167.81 155.36 151.23 Source: Bloomberg
BUSINESS ANALYSIS
Industry Updates
•  Mar 31, 2014 – High demand for H1-­‐B visas ▫  Short of technologically skilled workers ▫  Demand is highest in 3 IT categories: information security, software engineering, big data •  Jun 23, 2014 – ‘Shadow It’ is gaining popularity ▫  Shadow It: “hardware or software that is not supported by an organization's IT department” ▫  Upsides: increase productivity, effective workclows ▫  Downsides: fail to comply regulations, security issue •  Sep 15, 2014 – IT spending to increase in state, local government ▫  Market analysis cirm, Deltek, “Government agencies will increase spending on information technology products and services by more than 3% annually over the next cive years” Source: Hoover’s
Business Trends
•  Globalization ▫  E-­‐commerce business broadened IT sector •  Foreign IT workers ▫  Specialized and talented IT foreign workers are imported •  Offshoring / Outsourcing ▫  To cut cost or boost international competitiveness ▫  Mainly offshore/outsource to India Source: Hoover’s
Business Challenges
•  Customer concentration ▫  A few large customers account for most of the revenue ▫  Customers consolidation profoundly impact cinancial consequences •  Corporate technology spending determines revenue ▫  Economic downturns will delay corporation upgrades, hence affect revenue •  Heavy capital investment required ▫  Equipment and facilities can be costly ▫  Smaller cirms often cannot serve large customers •  Dependence on key employees ▫  Companies rely heavily on talented IT experts •  Rapid and competitive technological advances ▫  IT sector develops rapidly and competitively
Source: Hoover’s
Business Cycle
•  Short product life cycle ▫  Market is very volatile •  Semiconductors & semiconductors equipment ▫  High pressure to innovate ▫  Regulatory compliance •  Software & services ▫  Patent debate ▫  Encouraging innovation or discouraging? •  Hardware & equipment ▫  Pressurizing semiconductor suppliers
Source: Morningstar
Phase of Life Cycle
•  Semiconductors & semiconductor equipment ▫  Decline •  Hardware & equipment ▫  Maturity •  Software & services ▫  Growth –  Driven by cloud computing and Big Data –  Cyber security poses a threat to growth •  InfoTech growing as a sector External Influences
•  Consumer spending ▫  Market outlook is positive
▫  Replacing and upgrading is high when market sentiment is positive
▫  Higher Cap-ex IT budgets
•  Government Regulations ▫  Outsourcing
▫  Economies of scale in production
•  Emerging markets
▫  Huge opportunity for tech products reaching maturity in developed markets
–  E.g. ERP systems, retail, etc.
Porter’s Five Forces Analysis
Barriers Suppliers’ Buyers’ Substitute Rivalry of Entry Power Power Products Software & Services Low Low High High High Technology Hardware & Equipment High High Low to moderate High High Extremely High Low High Low Moderate Semiconductor & Semiconductor Equipment ECONOMIC ANALYSIS
Tech & GDP
Source: Bloomberg
Tech & Total IT Spending
Source: Bloomberg
Tech & Personal Consumption
Expenditure
Source: Bloomberg
Tech & CPI (IT)
Source: Bloomberg
FINANCIAL ANALYSIS
Sales Forecast
•  Expected increase in Sales in Q1 2015 Source: Bloomberg
Free Cash Flow
Source: Bloomberg
Sales Estimate
YTD increase •  S&P 500 -­‐-­‐ 4.14% •  InfoTech Sector -­‐-­‐ 8.04% Source: Bloomberg
R&D Expense
•  9.68% growth in R&D expenditure •  Biggest change since FY 2011 Source: Bloomberg
Gross Margin
Growing faster than the S&P 500 for the 2nd consecutive year •  1.27% vs. 0.36% •  Manufacturing costs are decreasing (low costs in software) Source: Bloomberg
EBITDA Margin
•  More stable increase than S&P 500 (esp. CY 14) •  1.14% vs. 2.35% Source: Bloomberg
Return on Equity
•  Lower than CY 13 •  Huge expected increase Source: Bloomberg
VALUATION ANALYSIS
Valuation
P/S P/E P/B P/EBITDA Cur High Avg Low Cur High Avg Low Cur High Avg Low Cur High Avg Low S5INFT 3.14 3.17 2.30 1.05 19.32 26.78 19.07 10.79 4.11 5.01 3.68 2.29 11.78 15.88 11.28 6.45 Highest P/E
▫  Twitter: 502.78 ▫  Salesforce.com: 108.44 ▫  LinkedIn: 104.85 Lowest P/E
▫  Micros Technology: 7.97 ▫  HP: 9.17 ▫  Seagate Technology: 9.94 •  Valuations vary signidicantly within the Technology sector ▫  Many companies in the manufacturing and hardware are relatively cheap because those industries are maturing. ▫  However many internet companies are in new and innovative industries so investors have to pay a premium for their expected growth. Source: Bloomberg
Valuation Relative to the Market
P/S P/E P/B P/EBITDA Cur High Avg Low Cur High Avg Low Cur High Avg Low Cur High Avg Low S5INFT 1.85 2.16 1.74 0.81 1.08 1.60 1.17 0.88 1.52 1.78 1.52 1.25 1.30 2.31 1.65 1.11 Tech trades at a premium over the SPX •  10 yr. avg. spread: 2.56 However the spread has tightened since the dinancial crisis •  3 yr. before cinancial crisis: 6.31 •  Since the cinancial crisis: 0.8 Recently the spread is begging to widen. •  Currently: 1.46 Source: Bloomberg
Valuation Relative to the Market
•  Interpretation: •  Before the cinancial crisis tech names were slightly overvalued. Then the crisis corrected valuations back to around those of the overall market. •  However recent advancements in mobile, cloud, big data, security, as well as the growth in major social network companies are driving valuations back up. Source: Bloomberg
RECOMMENDATION
Recommendation
•  Overweight ▫  Currently: + 2.1% , Recommend: +2.25% •  Benedits ▫
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Innovation Opportunities in Emerging Markets Growth Potential Upcoming Trends: Cloud, Big Data, Mobile Payments, Security •  Risks ▫  Weakening Macro Economy ▫  Valuation in the Internet Software & Services Sector –  20% index, 46 P/E ▫  Intense Competition –  Overseas low-­‐cost “white box competitors” ▫  Piracy, Security, Intellectual Property ▫  Regulations
Recommendation: Industry
Mkt Cap Mkt Cap Software & Services Technology Hardware & Equipment Semiconductor & Semiconductor Equipment Total Prodit 1Y Rev. P/E P/E Margin Growth 2014E 2015E 3.94T 52.3% 17.90% 5.85% 17.6 15.42 2.56T 34.0% 14.89% 1.25% 12.86 11.65 1.03T 13.7% 17.66% 4.52% 14.31 12.97 7.53T 100.0% Overweight: Semiconductors ▫  High procitability and growth at signicicantly cheaper ▫  Strongest performer YTD ▫  Currently zero exposure Source: Bloomberg
Q&A
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