Investing

Credit Suisse Initiates 20 Tech Hardware Stocks, Over Half Rated Outperform

Paul Ausick

Published: August 19, 2022 1:38 pm

As recently as July 1, tech sector stocks traded down about 23% in 2022. The hardware industry performed even worse, down nearly 27% on the same date. Since then, however, the tech sector has narrowed its loss to around 10% while the hardware industry’s loss has shrunk to just 2% for the year to date.

Analysts Shannon Cross and Ashley Ellis at Credit Suisse have initiated coverage of 20 top hardware stocks, awarding Outperform ratings to 11, Neutral ratings to seven and Underperform ratings to two. Included in this group are 13 traditional tech stocks, two equipment manufacturing services (EMS) providers and five 3D printing stocks.

Before going into some detail about the top-rated stocks, here is a quick look at some of the stocks that were rated either Neutral or Underperform.

3D Systems was given an Underperform rating and a price target of $8. Based on a current price of around $11.20, Credit Suisse expects shares to drop 29% of their value. The analysts noted rising costs and sagging gross margins.

The other Underperform rating went to Xerox, along with a price target of $14. That implies a price decline of around 24% from a recent price of about $18.40. Analysts Cross and Ellis do not expect operating margins to rise into double-digits again “in the foreseeable future.”

Hard drive makers Seagate and Western Digital were both started at Neutral. Seagate’s price target of $80 is within pennies of the current price. Western Digital’s price target of $52 implies a potential gain of 9% based on a price of around $47.70 a share.

3D printer makers Markforged and Velo3D were also started with Neutral ratings. Markforged’s price target is $2.70 and Velo3D’s is $5.40. At current trading levels, Markforged stock trades only pennies below the target. Velo3D’s potential upside, based on a recent price of around $4.25, is 27%.

Among the Outperform-rated stocks, Apple Inc. (NASDAQ: AAPL) is one of the analysts’ top picks. Apple’s strong balance sheet, mountain of cash, massive installed base and growing subscription and services businesses are a potent combination. Cross and Ellis assumed coverage of Apple with a price target of $201, implying an upside of around 17% to the current price. They commented: “In our view, Apple’s large cash balance provides the company with ample dry powder for organic investments, shareholder return, and continued M&A.”

CDW Corp. (NASDAQ: CDW) is a value-added reseller of computer hardware and software. Credit Suisse’s Outperform rating is accompanied by a price target of $202, implying an upside of 7.7% to the stock’s current price. The analysts note that over the past dozen years, CDW has outperformed the tech market by an average of 3.3% annually. A drop in demand for PCs, which account for around 40% of the company’s business, is a major risk to the stock price.

PC maker Dell Technologies Inc. (NYSE: DELL) was started with an Outperform rating and a price target of $60, implying an upside potential of around 26%. As is the case with CDW and other PC makers in Credit Suisse’s coverage, a sharper-than-expected drop in PC demand is a major risk. The company’s foray into cloud services is a positive, but there are a lot of competitors for customers.

Flex Ltd. (NASDAQ: FLEX) is a Singapore-based top-tier EMS provider. Credit Suisse initiated coverage on the stock with an Outperform rating and a $24 price target of. At a recent price of around $18.80, the upside potential to the price target is 27.7%. The company’s diverse markets (Credit Suisse named six) give Flex “a natural offset to cyclical spending and product launches.” If consumer demand is weak, demand from, say, the auto industry can pick up the difference.

Hewlett Packard Enterprise Co. (NYSE: HPE) was given an Outperform rating and a price target of $18, implying an upside potential of about 21% based on Friday’s noon-hour trading price. The company owns a 49% stake in a joint venture with a Chinese enterprise hardware maker and is developing recurring revenue services offerings, both of which are currently growing but subject to some risk.

HP Inc. (NYSE: HPQ) gets an Outperform rating and a price target of $39, implying an upside of around 12.8% to the share price. Risks to Credit Suisse’s outlook include a faster demand decline for PCs, continued supply chain issues and “the inability to scale growth businesses” like its printing ink subscription program.

Cross and Ellis have assumed coverage of International Business Machines Corp. (NYSE: IBM), maintaining an Outperform rating and a $163 price target. At a share price of around $138.50, the implied upside is 17.7%. The analysts note that the spin-off of Kyndryl and the acquisition of Red Hat two years earlier means that IBM ” has embraced a software/solutions-first model.” Software generated 41% of fiscal 2021 revenue.

Jabil Inc. (NYSE: JBL), like Flex, is a top-tier EMS provider. Credit Suisse has given the stock an Outperform rating and a price target of $74. The implied gain based on a price of around $63.00 is about 17.5%. Credit Suisse expects fiscal 2022 revenue to be up 30%, compared to fiscal 2019, with an operating margin of 4.6%, up 1.14% from 2019 levels. Given that success, the company is aiming to get operating margins to 5% in the next few years

The analysts initiated coverage on NetApp Inc. (NASDAQ: NTAP) with an Outperform rating and a 12-month price target of $87. The upside potential based on a price of around $74.00 is 17.6%. The company’s cloud storage and other recurring services have increased recurring revenue by a factor of 10 since 2019. The company also has said it would slow its acquisition pace and return more cash to shareholders.

Pure Storage Inc. (NYSE: PSTG) was also initiated at Outperform and given a price target of $36. The stock is trading near $30.60, implying an upside potential of 17.6%. Pure Storage makes and sells flash memory as a service, and the analysts note that the company’s entire product portfolio is both modular and “evergreen.” Some 97% of flash arrays purchased in the past six years are still in use.

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Stratasys Ltd. (NASDAQ: SSYS) is the only 3D printer maker that gets an Outperform rating from Cross and Ellis. The analysts have a price target of $24 on the stock, implying a potential upside of nearly 30% to a price of around $18.50. Stratasys having chosen to focus on polymer technology is a plus in the analysts’ eyes, and they expect sales to sales to grow in the near term after six years of decline.