The popularity of smart phones and tablets have placed firms such as Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) a in advantageous long term position. These devices, which combine various social networking, gaming, scheduling and other business functions, have quickly moved from wants to must-haves and have managed to capture consumer fascination, as we live more active and on-the-go lives. Analysts expect the usage of these devices to continue to explode.
In a recent report by IT research firm Gartner, not only did they forecast what "old technology" has become, but in a separate report they offered a clear glimpse of where it is heading - remarkably the recent acquisitions (highlighted above) more than support that theory. The article was quoted as saying the following:
IT budgets and responsibilities are moving out of the control of IT departments and into the hands of others, thanks to trends such as consumerization and cloud computing, Gartner says in its vision for 2012 and the coming years. That means, to be successful, IT organizations will have to excel at relationship management and be adept at coordinating more widely distributed activities, according to Daryl Plummer, managing vice president and Gartner fellow.
As users take more control of the devices they will use, business managers are taking more control of the budgets IT organizations have watched shift over the last few years," Plummer said in a statement. "The IT organization of the future must coordinate those that have the money, those that deliver the services, those that secure the data, and those consumers who demand to set their own pace for use of IT." IT departments need to adapt now or be swept aside, Plummer warned.
Evidence of this shift has already been seen by the declining PC and server market over the past several quarters. Does that mean firms such a Hewlett Packard and Dell should be avoided? I would certainly think that it is not a favorable position to be in. And it certainly does present an extra layer of due diligence that each investor much consider. The fact of the matter is, there is no money in dying trends, only in the birth of new ones. So as these trends continue to take shape aside from the aforementioned Apple and Google, here are 3 stocks to add and 2 to sell to prepare for the shift.
ARM Holdings (NASDAQ:ARMH)
For me, one of the names that continue to come up is ARM Holdings. Not only has this once unknown company come out of nowhere to take a chunk out of Intel's (NASDAQ:INTC) market share, but it has also forged huge deals with Microsoft (NASDAQ:MSFT) for use of its chip technology in the upcoming release of Windows 8. Furthermore, it is widely known that PCs are losing share, while smartphones and tablets are becoming more ubiquitous in both the consumer and corporate environments.
So the question is, why not own a company that produces the technology being used by many smartphone and tablet manufacturers? It's really that simple, and ARM Holdings is now the clear-cut answer, given that ARM already owns 75 percent of the mobile processing market that is only going to grow more in popularity.
To its credit, Nvidia delivered a decent third quarter. In fact, I can say that it was a good quarter considering the fears that I had upon seeing the declines from the likes of Oracle (NYSE:ORCL) that signaled weakness in technology spending -- and to some extent, from Cisco (NASDAQ:CSCO) as well. Both firms typically are used as a gauge for monitoring corporate spending habits. As with both ARM and Atmel, Nvidia stands to benefit immensely from Apple's success. The question is, can it make more ground in the tablet and smart phone market? This is the challenge that its management must address.
Nvidia still remains intriguing at this point. While the stock has indeed taken a significant beating for most of 2011, and has hovered near its 52-week low for quite some time, it may be prudent to wait one more quarter until all the dust settles before taking a position. But investors that have a high risk tolerance, and are willing to bet on its ability to secure the type of share required to generate growth from higher margins, may consider it at any point.
As with ARM, there is a case for a company such as Atmel, really for a lot of the same reasons. The company competes in a wide variety of different markets in the chip industry. The company's products include microcontrollers, programmable logic devices, and a wide range of proprietary system-on-chips and nonvolatile memory chips. The company manufactured about 93% of its own chips in 2007. It sells its products into many different end markets, including communications, consumer electronics, computing, as well as automotive.
Granted, as has been the case for most tech companies, it has had its own fundamental challenges at the onset of the recession. But not all companies succeed in self-improvement to the extent that Atmel has. This modest semiconductor company is a good example of the rewards that can accrue when patient shareholders and committed management intersect. From a fundamental standpoint, Atmel has outpaced its peers over the past several quarters. Its microcontroller business is healthy, and though I have pointed out the benefit of it being a part of Apple's ecosystem, it is worth noting that Atmel is also gaining share in the non-Apple gadget market, as well with its line of maXTouch controllers which basically run the touch-screen interfaces on several devices. Atmel is a buy!
Whenever any company's bread and butter is spelled with the two letters "PC," it is a clear sign that any success for Apple will come at its expense. This is the predicament in which tech giants DELL and Hewlett Packard find themselves. Dell in particular cannot afford any more share loss, though it has been widely known that its PC sales have been on a steady decline for the past two years. In its most recent quarter, the company reported net revenue that was essentially flat, at $15.4 billion, and consisted of a 2% drop in product sales.
Beyond services, the remaining segments of its business posted negative growth, with the largest declines in storage and desktop PCs, which fell 15% and 6%, respectively. It's the results of the desktop PCs and storage units that tell how critical this situation may become as it was already one of the poorest performers of its business.
Hewlett-Packard is another company that cannot afford hiccups of any kind since it is now just warming up to its new CEO in Meg Whitman. During its Q4 2011 earnings announcement, the company did a decent job of assuring investors of its new future and a possible restoration of prominence, but there was also evidence that it is still suffering from poor execution and lack if investment spending. It reported Q4 non-GAAP net revenue of $32.3 billion, down 3% from the same quarter in 2010.
The company posted non-GAAP diluted earnings per share of $1.17. Analysts expected HP to post earnings of $1.13 a share on revenue of $32.05 billion. The company had indicated plans to focus heavily and inject capital into its PC division as well as its IT services business, which includes boosting research spending and limiting the size of acquisitions. This is a far stretch from the company's previous strategy that involved neglecting some of its key assets. How much of its internal investments it will be able to recover remains to be seen. But it certainly does not look promising for anyone in Apple's space. Oh, and by the way, it's still trying to push its TouchPad tablet. Your guess is as good as mine as to why.
Disclosure: I am long ATML, ORCL, CSCO.