Global Technology

Global Technology| July 22, 2015 MORGAN STANLEY & CO. LLC July 22, 2015 Katy L. Huberty, CFA [email protected] +1 212 761-6249 GGlloobbaall TTeecchhnnoollooggyy Joseph Moore [email protected] +1 212 761-7516 Global Insight: Cloudy with a Chance of James E Faucette Revisions [email protected] +1 212 296-5771 Keith Weiss, CFA [email protected] +1 212 761-4149 Our new proprietary global cloud capex tracker highlights growth MORGAN STANLEY ASIA LIMITED+ deceleration that will weigh on server & component suppliers. We Jasmine Lu lower ests. on 11 global technology stocks; downgrade Aspeed, [email protected] +852 2239-1348 MORGAN STANLEY TAIWAN LIMITED+ QLogic, Seagate, WD & our US IT Hardware view to Cautious. Charlie Chan [email protected] +886 2 2730-1725 Chinks in cloud armor begin to show: 2015 capex growth of 20% is Grace Chen down from 37% last year. We capture $85B of capex plans for 19 of the [email protected] +886 2 2730-2890 largest contributors to data center spend, including cloud and consumer Sharon Shih Internet service providers, and account for 40%+ of web traffic and enterprise [email protected] +886 2 2730-2865 cloud spending. We estimate 20% growth in 2015 based on a combination of MORGAN STANLEY & CO. INTERNATIONAL PLC, SEOUL BRANCH+ company guidance and our estimates. This is a deceleration from strong 37% Shawn Kim growth last year and from our original 2015 capex growth forecast of 24%. [email protected] +82 2 399-4940 Reported 1Q15 capex spend represented 21% of total year investment, up MORGAN STANLEY & CO. LLC from 19% historically, pointing to a more front-end loaded year. Yet 1H15 Brian Nowak, CFA [email protected] +1 212 761-3365 estimates suggest the portion of 1H15 spending is in line with the 3-year MORGAN STANLEY MUFG SECURITIES CO., LTD.+ average. These data points make us cautious on server & storage growth Shoji Sato headed into the historically strong 3Q for cloud-related investments. [email protected] +81 3 6836-8404 More cautious on server & storage suppliers; downgrading several stocks. Cloud data center growth has provided a cushion to offset weak spend IT Hardware in traditional enterprise & consumer segments in the past 3 years. We think North America the cushion may thin NT and offer greater visibility on underlying weakness in IndustryView Cautious enterprise & commercial segments. Our June CIO survey pointed to incremental enterprise IT budget weakness, which combined with the cloud capex downtick drives several est & rating cuts across our global tech research We downgrade the US IT Hardware industry view from coverage. We lower ests for 11 global tech stocks with server exposure & In-Line to Cautious, and ratings for Aspeed (from OW to above-normal seasonal growth in 2H15. We cut ests as much as 27% (for EW), QLogic (OW to EW), Seagate (OW to UW), Western WDC) & PTs as much as 30%+ due to lower forecasts & multiple compression. Digital (OW to EW). We lower estimates for 11 global On cloud-exposed semi names, we trim our ests but maintain ratings for technology stocks with exposure to decelerating cloud capex Broadcom, Cavium, Marvell & Avago – and highlight our concern that Intel’s growth (see page 4). LT assumptions in data center are too optimistic. As a result of significant est risk, we downgrade Aspeed, QLogic, Seagate & Western Digital. We see greater upside at companies with strategic catalysts (HP), high exposure to Apple (Hon Hai, Quanta) & those taking hyperscale share (Quanta, Inspur). Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict Lower capex plans likely a function of growth slowdown and focus on of interest that could affect the objectivity of Morgan profitability. Lower capex coincides with slowing cloud & Internet service Stanley Research. Investors should consider Morgan provider revenue growth, suggesting reduced investments are tied to business, Stanley Research as only a single factor in making their investment decision. not temporal factors like technology cycles or reduced purchasing lead times FFoorr aannaallyysstt cceerrttiiffiiccaattiioonn aanndd ootthheerr iimmppoorrttaanntt ddiisscclloossuurreess,, (which was blamed for volatility in 2014). We also believe several companies rreeffeerr ttoo tthhee DDiisscclloossuurree SSeeccttiioonn,, llooccaatteedd aatt tthhee eenndd ooff tthhiiss in our tracker (e.g., Amazon, Google) are more focused on profitability, which rreeppoorrtt.. += Analysts employed by non-U.S. affiliates are not registered with FINRA, may could continue to pressure capex midterm. Some companies, including not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and Seagate & QLogic, have suggested weaker cloud demand in the June quarter, trading securities held by a research analyst account. yet Intel highlighted strength in the cloud segment on earnings last week. 1