Data Shows Continued PC, HDD and Printer Growth in 2H21, Bullish For Apple (AAPL), CDW (CDW), Dell (DELL), and HP (HPQ), Unprecedented Chia Mining Demand Helping Seagate (STX) - Morgan Stanley

June 11, 2021 8:01 AM EDT
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Morgan Stanley analyst Katy Huberty believes the investing community is far too concerned about the second-half outlook for PCs.

Proprietary US channel data strengthens confidence in PC, HDD, and Printer outlook. However, she says that the time has come to be more selective following 6-9 months of strong outperformance.

“Investors are overly concerned about the 2H21 PC outlook. Demand indicators remain strong across the board (see here),and our proprietary PC channel inventory data also suggests elevated demand can sustain. Our PC channel inventory data suggests normalized weeks of inventory are still meaningfully below pre-COVID levels – roughly ~3.5 weeks today compared to the normal 6 weeks pre-COVID – suggesting investor fears about moderating PC demand are overblown. Our channel data also builds conviction in the strong 2H outlook for HDDs and Printers,” the analyst said in a memo.

Strong outlook for HDDs and Printers is bullish for the Overweight-rated stocks Seagate (NYSE: STX) and HP (NYSE: HPQ). On the other hand, the PC-exposed stocks - Apple (NASDAQ: AAPL), CDW (NYSE: CDW), Dell (NASDAQ: DELL) and HPQ, are also likely to benefit from the strong hardware demand.

“Investors fear that the recent increase in channel inventory indicates weakening PC demand. We believe this is the wrong way to look at it. US channel inventory did increase from January to early April with and without Samsung. For context, Samsung aggressively filled the channel ahead of its Galaxy Book launch which has inflated channel inventory data; therefore, we believe it’s appropriate to exclude Samsung for total inventory and instead look at data for the leading PC OEMs.

“Importantly, we're now seeing the supply constraints that have restrained ODM builds/shipments flow through to lower US channel inventory. This suggests demand remains elevated and the earlier increase in channel inventory was a function of greater supply, not materially weaker demand.”

Huberty highlights that the number of weeks of PC channel inventory is still significantly below pre-COVID levels after adjusting for demand.

“We believe it's misleading to directly compare absolute inventory levels today with pre-COVID – demand is materially higher today, which means that channel inventory should exceed pre- COVID levels before it reaches 'normalized’ levels.”

On the HDD front, demand for mining energy-friendly cryptocurrency Chia (XCH) has depleted channel inventory. In the US, HDD channel inventory is near all-time lows on a trailing three-week basis.

“However, we've seen the first W/W increase in trailing three-week inventory since the beginning of January 2021. Inventory levels are up 18% W/W off an all-time low driven primarily by an increase in STX inventory. One data point doesn't make a trend, but the reversal is noteworthy given the deterioration in Chia farming economics following the nearly 50% Chia price decline over the last ~2 weeks (from $1005 to $515),” Huberty continues.

Given the decline in Chia price, the analyst expects demand to become more moderate.

“Despite a moderation in Chia demand, HDD vendors are likely to benefit from higher pricing as they refill channel inventory for the next several quarters at least, if not for the next several years given the increasing number of contractual agreements with Cloud and Enterprise OEM customers.

On the printer hardware front, there is “ample room for additional channel fill entering the second half of 2021 – particularly for HP,” Huberty concludes.

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Morgan Stanley, Katy Huberty