Market Insights

Stocks have tumbled in the last week as investors worry about the omicron variant of coronavirus. However a certain group of technology firms was rallying before the selloff: computer hardware.

HP (HPQ) and Dell Technologies (DELL), the world’s No. 2 and 3 PC makers, reported better-than-expected earnings and revenue last week. Global leader Lenovo, which trades in Hong Kong, issued similarly positive results earlier in the month.

“All signposts point to continued strong market demand, and we intend to continue winning in the consolidation and gaining share over the long term,” DELL Chief Operating Officer Chuck Whitten said on the conference call. Commercial revenue grew a record 40 percent to $12.3 billion.

HPQ’s CEO, Enrique Lopes, made similar comments: “As more offices reopen, we lead our shift toward Windows based commercial products where we saw their strongest demand and highest profitability. We continue to see significantly elevated order backlog.”

A combination of PC upgrades and purchases for new employees is driving the boom. There’s also growing demand from consumer gaming and data centers.

The turnaround has surprised Wall Street, which for years have shunned the industry in favor of newer products like smart phones and cloud computing. Analysts are scrambling to keep up, with researchers at banks including B of A, Wells Fargo and Deutsche Bank raising price targets.

Stock Valuations

Valuations could be another talking point because PC makers trade for less than 10 times earnings. Flashier stocks like Apple (AAPL) and Nvidia (NVDA), in comparison, trade for 28 times and 65 times, respectively.

Global markets could be another part of the story. Research firm Canalys reported yesterday that the European PC market grew 21 percent in the third quarter thanks to strong commercial demand. China also had record shipments as Beijing’s push for automation (known as “Industry 4.0”) drove business demand.

Next, increased PC sales is helping suppliers. Three companies in particular have recently gotten attention from Wall Street:

• Seagate Technologies (STX): The maker of old-fashioned hard drives broke a downtrend in late October after earnings, revenue and guidance surprised to the upside. It proceeded to rally above $100 for the first time ever and has paused around that level since.
• Micron Technology (MU): The memory-chip company jumped last week following an upgrade by Mizuho, which cited unexpectedly strong PC demand.
• Western Digital (WDC): The maker of hard drives and memory chips had weak results on October 28. But it also jumped on the Mizuho call.

In conclusion, investors have mostly ignored PC makers as “boring” for years. There have also been supply-chain issues (especially for HPQ and WDC). However the price action and news flow suggests Wall Street is starting to pay attention again.