Tech & telecom: We see opportunities in Apple and Microsoft

While the tech sector looks fairly valued to us, we see opportunities in smartphone- and cloud software-related vendors.

Brian Colello, CPA 8 July, 2016 | 5:00PM

Firms with exposure to the smartphone market have faced some tough times in recent quarters, as  Apple (AAPL) iPhone demand has not lived up to prior expectations and the company reported its first year-over-year quarterly revenue decline since 2003. Meanwhile, the rest of the smartphone market hasn't fared much better; we've seen some company-specific market share shifts across the Android ecosystem, but in total, smartphone unit sales will fail to achieve double-digit growth in 2016 for the first time this decade. In turn, a host of components suppliers have sold off accordingly.

Despite this near-term sluggishness, we remain confident that the strong secular shift away from feature phones and toward more advanced smartphones is still intact. Although we no longer foresee exponential iPhone growth for Apple, we think that customer switching costs will drive most iPhone customers today to buy future iPhones tomorrow, thus supporting the company's unmatched free cash flow generation.

Microsoft's evolution will yield long-term success

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About Author

Brian Colello, CPA

Brian Colello, CPA  Brian Colello, CPA, is director of technology, media, and telecom equity research for Morningstar.

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