2025 Outlook_ Optimism With A Side Of Uncertainty

Industry Overview * Hardware Growth Acceleration: The report forecasts hardware growth to accelerate in 2025, with a focus on enterprise vs. consumer end markets. However, the current valuation at 19 P/E for 4-7% rev/EPS growth in 2025 suggests that acceleration is already priced in. * CIO Survey: The 3Q24 CIO survey indicates that CIOs expect spending on PCs, servers, and storage to accelerate in 2025. This aligns with the overall optimistic outlook for hardware spending growth. * Tech Hardware Valuation: Tech hardware stocks are currently trading at an all-time high P/E of 19x, which is 4-6x turns above valuations at similar points in past cycles. This suggests that the market has already priced in a growth re-acceleration in 2025. * Hardware Spending Expectations: The report forecasts average enterprise hardware revenue growth of 3% Y/Y in 2025, with the strongest growth in AI servers and PCs. Average consumer hardware revenue growth is expected to be 3% Y/Y, ~175bps below consensus. * Macroeconomic Factors: The report identifies macroeconomic factors such as interest rates, inflation, and employment as headwinds to hardware spending. However, it also notes that clarity on the presidential election and a favorable interest rate environment could alleviate some of these concerns. * Tail Risks: The report identifies tariffs and cuts to government spending as potential tail risks to hardware spending in 2025. However, it believes that the impact of these risks is less significant than perceived. Key Companies and Their Outlooks * Apple (AAPL): The report maintains an Overweight rating on Apple, considering it the Top Pick in the US IT hardware coverage universe. The company is expected to benefit from a multi-year iPhone refresh cycle and consistent double-digit Services growth. * Dell Technologies (DELL): Dell remains one of the core IT hardware Overweights, well-positioned to benefit from accelerating AI server orders and a cyclical recovery in core servers, storage, and PCs. * Seagate Technology (STX): Seagate is considered an Overweight due to its strong position in the HDD market and potential for revenue and gross margin expansion. * Kornit Digital (KRNT): Kornit is the top small cap Overweight, leading in the digital textile printing market with strong growth and margin trajectory. * Garmin (GRMN): Garmin is Underweight due to concerns about sustainability of its growth rates and negative risk-reward profile. * Sonos (SONO): Sonos is Underweight until clearer evidence that the negative consumer reaction to the mid-2024 app update has passed. * Xerox Corp (XRX): Xerox is Underweight due to challenges in its core business and uncertain macro environment. * CDW Corporation (CDW): CDW is Equal-weight, potentially undervalued as a way to play a more robust cyclical recovery in 2025. * Ingram Micro (INGM): INGM is Equal-weight, with potential for upside as a beneficiary of a more robust cyclical recovery in 2025. * Logitech (LOGI): LOGI is Underweight due to concerns about execution and valuation. Conclusion The report provides a comprehensive overview of the IT hardware industry, highlighting key trends, risks, and opportunities. While the industry is expected to grow in 2025, valuation concerns and macroeconomic uncertainties remain. The report offers valuable insights for investors looking to navigate the complex landscape of the IT hardware industry.