Credit Suisse, IT Hardware --OVERWEIGHT -Serving the Smart Era

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IT Hardware ------------------------------------------------Initiating Coverage with OVERWEIGHT
Serving the Smart Era


● From Cyclical to Structural Growth. Based on an extensive study
of end demand for the IT hardware and IT services sector, we see
the $1.2tn market growing 4% per annum through 2015. Our
analysis suggests that IT is being under consumed by the global
economy when we look at levels of net tech investment, especially
given the healthy corporate backdrop. Given the above and sector
valuations, we initiate coverage of the sector at Overweight.
● PCs forecasting: Think Compute; Tablets a $120 bn Opportunity. We
have developed what we believe is the first econometric model for
projecting computing demand. When combined with our commercial
PC model, we conclude that installed base for computing products
will rise to 2.4bn by 2015, driven by a high elasticity of demand,
resulting in 14% unit & 4% revenue growth long term.
● Smartphones, Storage, and Services Driving the Market, while
Traditional PCs and Printing and Servers Face Headwinds.
Beyond tablets, we see healthy 14% revenue growth within
smartphones (we are again raising our estimates), 10% revenue
growth in networked storage, and 5% revenue growth in services
● Apple, EMC, and HP Are Outperform Rated, while IBM, Xerox,
and NetApp Are Neutral Rated; Dell and Lexmark Are
Underperform Rated. Apple is our top pick, and we initiate with
EPS estimates that are 10%/24% above consensus for FY11/12
and see upside to $500.
Serving the Smart Era
From Cyclical to Structural Growth. Our analysis suggests that IT is
being under consumed by the global economy when we look at levels
of net tech investment, especially given the healthy corporate
backdrop. Such underinvestment comes at a time when we believe IT
infrastructure needs to cope with the megatrends of virtualization,
move toward cloud computing, and explosive growth in smart devices,
including smartphones and tablets.
PCs forecasting: Think Compute; Tablets a $120bn Opportunity.
Our proprietary PC price tier analysis suggests tablet unit volumes of
65mn/116mn in 2011/12 and long-term revenue of $120bn which
represents 42%/42% of overall PC industry volumes/value.
Smartphones, Storage, and Services Driving the Market, while
Traditional PCs and Printing and Servers Face Headwinds.
Beyond tablets, we see healthy 14% revenue growth within
smartphones (we are again raising our estimates), 10% revenue
growth in networked storage, and 5% revenue growth in services. By
contrast, we expect the PC industry excluding tablets to decline 6%,
printing (hardware and supplies) to remain flat, and servers to decline
2% long term (through 2015).
Apple, EMC, and HP Are Outperform Rated, while IBM, Xerox, and
NetApp Are Neutral Rated; Dell and Lexmark Are Underperform
Rated. Apple is our top pick, and we initiate with EPS estimates that
are 10%/24% above consensus for FY11/12 and see upside to $500.
EMC is a direct play on networked storage and virtualization and
given scope for sustained share gains, bottom-line growth should be
robust at 20% per year, meaning EMC should trade at our target excash
P/E of 16x giving upside to $34. For Dell, we initiate with an
Underperform rating owing to anemic top-line growth and only gradual
expansion in margins.