US Equities Information Technology - 18 for '18: Topics, trends, and ideas for the Technology & Telecom sectors | 11 January 2018 - UBS
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US Equities Information
Technology
18 for '18: Topics, trends, and ideas for the Technology & Telecom sectors | 11 January
2018
Chief Investment Office Americas, Wealth Management
Kevin Dennean, CFA, Technology Equity Sector Strategist Americas, kevin.dennean@ubs.com
• 2017 was a stellar year for performance in the Information
Technology (IT), but a year Telecom Services equity owners
would rather forget.
• Our equity strategy group recommends a moderate overweight
allocation to the IT sector and a neutral allocation to Telecom.
• We provide 18 topics, trends, and ideas that we believe will be
the center of investors' discussions for 2018.
1. Repeats are hard. We are constructive on the IT sector's
investment return potential in 2018, but we believe gains will
be significantly more modest than 2017.
2. IT spending is improving, finally. Continued healthy profits
globally and improved clarity around cloud strategies should
drive accelerating IT spending.
3. A better balance between Value, dividends, and Growth
in IT sector performance. After a year of massive
outperformance, Growth doesn't necessarily have to sell off,
but a combination of factors may benefit Value/dividend
technology stocks.
4. Tax reform is a modest positive for the IT sector, but less
than for other sectors. IT sector taxes are already lower than
most other sectors.
5. Repatriation benefits are highly concentrated within
the IT sector. We expect the largest beneficiaries to favor
M&A over increasing capital returns.
6. 2018 should be another good year for IT bankers as IT
sector M&A should increase off of elevated levels.
7. Cryptocurrencies will continue to "ripple" through the
markets, but the underlying value (and use case)
remains cryptic. True value remains cryptic.
8. Technology investors are in the "Upside Down"...and
that may be for the best. Artificial intelligence (AI), virtual
reality (VR) and augmented reality (AR) may be the most
important themes of the next decade, but lack pure plays
in contrast to prior cycles. However that may be a positive
This report has been prepared by UBS Financial Services Inc. (UBS FS). Analyst certification and required disclosures
begin on page 27. UBS does and seeks to do business with companies covered in its research reports. As a result,
investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
US Equities Information Technology
given the long list of transformative technologies that were
catastrophic investments.
9. Mega cap technology companies may not be pure plays
on AI, VR and AR, but they have the best "real options".
Valuations don't seem to reflect longer-term positioning.
10. With great data comes great responsibility...and greater
regulatory risk. Politicians and regulators globally are
focused on large internet companies unprecedented scale
and reach. Heightened regulatory may cap price/earnings (P/
E) multiples, but are still constructive due to strong earnings
growth.
11. Cloud spending remains vibrant, and hybrid is moving
into the mainstream. Better clarity on cloud strategies and
hybrid cloud adoption should be a benefit for some "legacy"
technology vendors.
12. The digital world is (still) a dangerous place.
Cybersecurity spending should outpace overall IT budget
growth, but the nature of security is changing from prevention
to detection and remediation.
13. Dust off your Commodore 64 - personal computers (PCs)
are back! After six years of continuous declines, PCs unit sales
should stabilize in 2018.
14. Peak smartphone is upon us. The smartphone industry
is likely at a peak due to the combination of saturated
developed markets with lengthening replacement cycles and
the inherently lower average selling prices in emerging
markets.
15. 5G - Even sooner than we thought. AT&T and plans
to launch mobile 5G service by the end of the year, and
even long-time skeptic T-Mobile USA is embracing the next
generation of wireless.
16. Communications equipment is poised for a comeback.
After underperforming the IT sector for a decade, we believe
a combination of factors (improving carrier spending, new 5G
networks, new product cycles) and valuation makes this group
attractive.
17. We're semi-interested in semiconductors. We prefer
semiconductor companies with low valuations, prospects for
cyclical end-market improvement, and "real options" that
aren't reflected in valuations.
18. Memory - it's not different this time...but it is different
at this time. Memory is still cyclical, but we believe the supply/
demand balance will remain healthy for the next few quarters.
UBS Chief Investment Office Americas, Wealth Management 11 January 2018 2
US Equities Information Technology
1. Repeats are hard.
In the 51 Super Bowls played since 1967, there have 8 repeat winners
(Green Bay Packers in Super Bowls I and II, Miami Dolphins in VII and
VIII, Pittsburgh Steelers in IX and X as well as XIII and XIV, San Francisco
49ers in XXIII and XXIV, Dallas Cowboys in XXVII and XXVIII, Denver
Broncos XXXII and XXXIII, and the New England Patriots in XXXVIII
and XXXIX. This works out to 16% repeat winners.
The odds of the top performing equity sector repeating its perfor-
mance are are about half as good. As seen in the chart below, the
odds of the top performing sector in the S&P 500 repeating its win-
ning performance are even lower. Based on the past 15 years, the
best performing sector only had a repeat once in the past 15 years,
or about 7%. Furthermore, the top performing sector actually under-
performs the S&P 500 60% of the time, with average next year rela-
tive performance of -3% (range of -27% for Energy in 2017 YTD to
+31% for Energy in 2004).
Fig. 1: S&P 500 - Annual total returns by sector
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Total Returns
Energy -11% 26% 32% 31% 24% 34% -35% 14% 20% 5% 5% 25% -8% -21% 27% -1%
Materials -5% 38% 13% 4% 19% 23% -46% 49% 22% -10% 15% 26% 7% -8% 17% 24%
Industrials -26% 32% 18% 2% 13% 12% -40% 21% 27% -1% 15% 41% 10% -3% 19% 21%
Cons. Discretionary -24% 37% 13% -6% 19% -13% -33% 41% 28% 6% 24% 43% 10% 10% 6% 23%
Consumer Staples -4% 12% 8% 4% 14% 14% -15% 15% 14% 14% 11% 26% 16% 7% 5% 13%
Health Care -19% 15% 2% 6% 8% 7% -23% 20% 3% 13% 18% 41% 25% 7% -3% 22%
Financials -15% 31% 11% 6% 19% -19% -55% 17% 12% -17% 29% 36% 15% -2% 23% 22%
Info. Technology -37% 47% 3% 1% 8% 16% -43% 62% 10% 2% 15% 28% 20% 6% 14% 39%
Telecom. Services -34% 7% 20% -6% 37% 12% -30% 9% 19% 6% 18% 11% 3% 3% 23% -1%
Utilities -30% 26% 24% 17% 21% 19% -29% 12% 5% 20% 1% 13% 29% -5% 16% 12%
REITs -15% 21% 22% 7% 37% -20% -45% 21% 28% 8% 16% -2% 26% 1% 0% 7%
Rank
Energy 3 7 1 1 3 1 6 9 5 7 10 8 11 11 1 10
Materials 2 2 7 6 7 2 10 2 4 10 7 7 9 10 5 2
Industrials 8 4 5 8 9 6 7 4 3 9 6 3 7 8 4 6
Cons. Discretionary 7 3 6 11 6 9 5 3 2 6 2 1 8 1 8 3
Consumer Staples 1 10 9 7 8 5 1 8 7 2 9 6 5 3 9 7
Health Care 6 9 11 4 11 8 2 6 11 3 4 2 3 2 11 5
Financials 4 5 8 5 5 10 11 7 8 11 1 4 6 7 3 4
Info. Technology 11 1 10 9 10 4 8 1 9 8 8 5 4 4 7 1
Telecom. Services 10 11 4 10 1 7 4 11 6 5 3 10 10 5 2 11
Utilities 9 6 2 2 4 3 3 10 10 1 11 9 1 9 6 8
REITs 5 8 3 3 2 11 9 5 1 4 5 11 2 6 10 9
Source: FactSet, UBS as of 2 January 2018
Although we remain constructive on prospects for the IT sector, we
believe a repeat of the strong outperformance of 2017 is unlikely.
Fundamentals remain healthy across many key verticals and end mar-
kets. However, valuation has generally increased, implying that at
least some of these solid fundamentals are priced in. Additionally,
while we believe earnings growth will be healthy at a low double digit
increase, we do not see significant upside to 2018 estimates to the
degree seen last year.
Assuming 4Q results for the sector are in line with consensus esti-
mates, 2017 IT sectors earnings will likely be 7% greater than expec-
tations of a year ago. However, roughly two thirds of the upside
should be driven by semiconductors, and approximately 50% due to
Micron (Most Preferred), which has been an outsized beneficiary of
UBS Chief Investment Office Americas, Wealth Management 11 January 2018 3US Equities Information Technology
price increases in memory. While we remain constructive on memory,
we nonetheless believe pricing will be much more moderate in 2018.
With limited earnings upside, we do not believe it is likely that the
sector will be rewarded with a higher P/E multiple.
Fig. 2: S&P 500 IT sector absolute P/E and P/E relative to the S&P 500
25x 1.4x
1.2x
20x
1.0x
Relative P/E
15x 0.8x
0.6x
P/E
10x
0.4x
5x
0.2x
0x 0.0x
Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan-
08 09 10 11 12 13 14 15 16 17
S&P 500 Info. Tech Sector
S&P 500 Info. Tech Sector rel. to S&P 500
Source: FactSet, UBS as 2 January 2018
2. IT spending is improving, finally.
Although the IT sector has been the best performing sector in 2017
and has lead all S&P 500 sectors in performance since the end of
the Great Financial Crisis, IT spending has been surprisingly lackluster.
In fact, based on 10 economic cycles since 1949, we believe that IT
spending is significantly lower than it should be given where we are
in the economic cycle.
In Figure 3, US IT spending growth is indexed to 100 as of the quarter
that corresponds to the trough in economic growth for each cycle
as defined by the National Bureau of economic research in the post-
World War II era. It's interesting to note that IBM's first mainframe
computer, the IBM 701, was introduced in 1952.
Fig. 3: US IT spending relative to GDP growth
Indexed
160
150
IT Spending relative to GDP
140
130
120
110
100
90
80
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32
Quarters from GDP Trough
Prior cycle averages June 2009
Source: US Bureau of Economic Analysis, UBS as of 2 January 2018
IT spending historically has lagged the overall economic recovery by a
quarter or two coming out of recessions. However, it then begins to
outperform overall economic growth and this outperformance accel-
UBS Chief Investment Office Americas, Wealth Management 11 January 2018 4US Equities Information Technology
erates the longer the recovery persists. This pattern held true for the
nine post-World War II recoveries. The pattern was broken following
the "dot com" bust and recession of 2001; we attribute this to the
"hangover" of overspending of the prior expansion.
IT spending has only been in line with overall economic growth in this
economic cycle. We attribute some of this underperformance (relative
to prior cycles) to the deflationary impact of the cloud, but perhaps
more importantly, to the uncertainty the cloud introduced to IT archi-
tectures.
Recent economic data points to improving IT spending. As seen in
Figure 4, after many fits and starts, growth in IT spending is beginning
to outpace non-IT GDP growth. This jibes with anecdotal evidence,
commentary from many IT companies, and surveys.
Fig. 4: IT spending growth vs. non-IT GDP growth
3%
2%
1%
0%
-1%
-2%
-3%
-4%
3Q09 2Q10 1Q11 4Q11 3Q12 2Q13 1Q14 4Q14 3Q15 2Q16 1Q17
Growth in IT spending - growth in non-IT GDP
Source: US Bureau of Economic Analysis, UBS as of 2 January 2018
In our view, the improvement in IT spending is driven partly due to bet-
ter corporate profits globally, but more so due to clarity on the part of
corporate IT buyers around how cloud architectures will impact their
IT operations. This clarity has driven at least some modest improve-
ment in Enterprise IT spending as evidenced by a string of better than
expected results from major IT vendors that have historically sold on-
premise IT solutions as opposed to cloud-based solutions.
UBS Chief Investment Office Americas, Wealth Management 11 January 2018 5US Equities Information Technology
3. A better balance between value, dividends, and growth in
IT sector performance.
We have advocated a preference for growth over value and dividends
in the IT sector for much of 2017. However, as seen in Figure 5, growth
has significantly outperformed value and dividends (using data from
UBS' quantitative team) in the IT sector over the past year. On a rolling
12-month basis, growth (as defined by trailing 12 months earnings
growth) is above the 90th percentile of relative performance com-
pared to value and dividend yield as measured over the past 15 years.
Fig. 5: Factor performance for rolling 6- and 12-month performance
Growth vs. Value, Growth vs. Dividends
60% 100%
Rolling 6 Month Relative
Rolling 12 Month Relative
50% 80%
40% 60%
Performance
30%
Performance
40%
20%
10% 20%
0% 0%
-10% -20%
-20% -40%
-30% -60%
Jan-02
Jul-03
Jan-05
Jul-06
Jan-08
Jul-09
Jan-11
Jul-12
Jan-14
Jul-15
Jan-17
Jan-02
Jul-03
Jan-05
Jul-06
Jan-08
Jul-09
Jan-11
Jul-12
Jan-14
Jul-15
Jan-17
Earnings growth (trailing 1 year) rel. to Value (trailing) Earnings growth (trailing 1 year) rel. to Value (trailing)
Earnings growth (trailing 1 year) rel. to Dividend yield (trailing) Earnings growth (trailing 1 year) rel. to Dividend yield (trailing)
Source: UBS as of 29 December 2017
We're not necessarily calling for a growth sell-off, but rather we
believe that a combination of factors could drive some outperfor-
mance by value stocks within the IT sector. Valuations for many of
the highest growth companies are near the upper end of their historic
valuations. While this alone is not a sufficient condition for share price
decline, it certainly could limit additional outperformance.
More importantly, we think the increasing adoption of hybrid cloud
computing may be a tailwind for legacy technology companies, which
often are more "value" and "dividend" than "growth".
We believe fundamentals are improving for Cisco, Juniper Networks,
and Intel, all of which are Most Preferred, and also have high exposure
to the dividend and value factors.
UBS Chief Investment Office Americas, Wealth Management 11 January 2018 6US Equities Information Technology
4. Tax reform is a modest positive for the IT sector, but less than
for other sectors.
The recently passed Tax Cut and Jobs Act calls for a reduction in the US
corporate tax rate from 35% to 21% and for repatriation of offshore
profits at a rate of 7% to 14%. Additionally, both plans call for a
territorial tax rate.
Based on reported figures and analyst estimates, the IT sector already
pays approximately a 20% tax rate, essentially in line with the new
statutory rate.
We believe the IT sector could see a modest benefit from a lower
corporate tax rate, but perhaps not as much benefit as other sectors
given the sector's already low tax rate. This compares to our sector
strategists' assessment of tax reform impact on the S&P 500 as seen
in Figure 6.
Fig. 6: Expected tax reform impact by sector
Large-cap sectors Impact Comment
Consumer High domestic exposure benefits retailing, media, and restaurants. Possible pick-up in
++
Discretionary consumer spending would also be supportive.
High domestic exposure benefits food and staples retailing. Mega-cap multi-nationals
Consumer Staples +
also benefit from repatriation. However, competition may limit gains for shareholders.
Limited benefits. Larger players have high overseas exposure, while domestic producers
Energy Limited pay little tax due to existing allowances. Certain domestic-based refiners, oil services, and
equipment manufacturers may benefit from a lower US corporate tax.
High domestic exposure. Key potential beneficiary of any pick up in expectations for
Financials ++
faster economic growth or firming inflation.
Health insurers (managed-care organizations) likely benefit most due to high domestic
Health Care +
exposure. Pharma and med-tech are more international but benefit from repatriation.
Domestically exposed transports, industrial distributors, and environmental services will
Industrials ++
benefit most. Pick-up in capital spending could boost capital goods manufacturers.
Information Limited change to overall tax rate (lower domestic rate will be offset by limits on shifting
+
Technology profits to low tax overseas jurisdictions). Key beneficiary of cash repatriation.
Materials + Less domestic exposure than the average sector.
REITs don't pay corporate taxes, so limited direct impact to funds from operations.
Real Estate + However, could benefit from a pickup in economic growth and REIT dividend tax rates
will fall, enhancing the appeal for taxable investors.
Telecommunication High domestic exposure. Benefits from immediate capex expensing. However,
++
Services competition may limit how much of the benefit will be retained by shareholders.
Utilities Limited Lower tax rates are passed on to consumers for regulated utilities.
Source: UBS
We also note that some large technology companies have benefit-
ed from shifting intellectual property (IP) to overseas subsidiaries. A
reduction in domestic tax rates will generally lower IT companies'
domestic tax rates, but for some this may be offset by higher tax rates
applied to offshore profits for some companies due to provisions in
UBS Chief Investment Office Americas, Wealth Management 11 January 2018 7US Equities Information Technology
the proposed tax reform related to base erosion prevention and taxes
on IP-based revenue.
In sum, the move to a territorial tax may potentially provide some
benefit to IT companies due the lower proposed domestic rate, but
this may also pose a risk to some companies that have shifted IP off-
shore. Limited financial and tax policy disclosures make a definitive
view on this issue difficult. In total, we believe the IT sector could see
a very modest increase in earnings per share from lower tax rates.
5. Repatriation benefits are highly concentrated within the IT
sector.
Repatriation of offshore profits may have a bigger impact on the IT
sector as it holds a disproportionate amount of all offshore cash within
the S&P 500 sectors. We estimate that the top five IT companies alone
account for more than 40% of the near USD 1tn of offshore cash. If IT
companies choose to use repatriated cash to increase stock buybacks,
the impact could be significant. We estimate 4% EPS upside versus
current calendar year 2018 estimates if the largest ten companies with
disclosed offshore cash was to repatriate these funds and then use
25% of net proceeds to repurchase shares. The impact increases to
8% EPS upside if 50% of net repatriated cash is used for share repur-
chase.
Fig. 7: S&P 500 Information Technology Sector
10 largest cash balances
Offshore % of Market
Company Market Cap cash Cap
Apple Inc. USD 890 USD 252 28%
Microsoft Corporation 680 132 19%
Alphabet Inc. Class C 716 61 8%
Intel Corporation 209 10 5%
Visa Inc. Class A 263 7 3%
Cisco Systems, Inc. 195 69 35%
Oracle Corporation 201 58 29%
Mastercard Incorporated Class A 166 5 3%
International Business Machines Corporation 150 6 4%
QUALCOMM Incorporated 98 29 30%
USD 3,570 USD 629
Source: Company filings, UBS (note that IBM offshore cash is UBS estimate)
We believe Cisco may be in the best position to capitalize on offshore
profits repatriation as we expect the company will make acquisitions
to accelerate its transition to more software-focused business.
UBS Chief Investment Office Americas, Wealth Management 11 January 2018 8US Equities Information Technology
6. 2018 should be another good year for IT bankers.
While we are comfortable with our scenario analysis for EPS buyback
sensitivity, we are highly skeptical that companies will be quite so
aggressive in shareholder returns due to repatriation. We note that
many of the largest companies have issued significant amounts of
debt over the past five years to fund share buybacks and dividends. To
be clear, many of the IT companies with the largest offshore cash bal-
ances still have some of the highest quality balance sheets in corporate
America. However, in our view, many technology boards, CEOs, and
CFOs will likely look at repatriated funds as an opportunity to pursue
transformative or growth-oriented mergers and acquisitions. In par-
ticular, we believe software companies with healthy growth prospects
will be the prime targets.
Fig. 8: Information Technology Sector M&A
350 3,500
300 3,000
Deal Volum (USD, bn)
250 2,500 Deal Count
200 2,000
150 1,500
100 1,000
50 500
0 0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Deal Volum (USD, bn) Deal Count
Source: Bloomberg, UBS
UBS Chief Investment Office Americas, Wealth Management 11 January 2018 9US Equities Information Technology
7. Cryptocurrencies will continue to "ripple" through the mar-
kets, but the underlying value (and use case) remains cryptic.
Cryptocurrencies including Bitcoin, Ethereum, Litecoin, and Ripple
dominated the financial press for much 2017. As discussed in Cryp-
tocurrencies: Beneath the bubble, 12 October 2017, we believe that
cryptocurrencies are not actually currencies at all. Bitcoin and its ilk fail
to satisfy two of the basic requirements of a currency as they are nei-
ther a widely accepted medium of exchange nor are they truly stores
of value.
Fig. 9: Bitcoin price
20,000
18,000
16,000
14,000
Bitcoin/USD
12,000
10,000
8,000
6,000
4,000
2,000
0
Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan-
17 17 17 17 17 17 17 17 17 17 17 17 18
Source: Bloomberg, UBS
Bulls and the more libertarian minded point towards the ultimately
limited supply of any single cryptocurrency. While this is true, it also
true that there is no mechanism for reducing a cryptocurrency supply
in response to falling demand, so the only response to falling demand
will be a likewise collapse in price.
The more favorably disposed might argue that this could never hap-
pen, or that the leading cryptocurrencies are the leading edge of a
new economic paradigm. However, we nonetheless see risks - while
the supply of any single cryptocurrency may be finite, the supply of
cryptocurrencies are infinite as seen in the more than 1,000 initial coin
offerings (ICOs) in 2017.
Bitcoin and its digital brethren will "ripple" (pun intended) through
the markets and the financial media. However, in our view their true
intrinsic value and their ultimate use case remains cryptic.
UBS Chief Investment Office Americas, Wealth Management 11 January 2018 10US Equities Information Technology
8. Technology investors are in the "Upside Down"...and that
may be for the best.
AI may ultimately be the most important technology development of
our times. AR and VR also hold tremendous promise. These technolo-
gies collectively will likely underpin investment themes for the next
decade or more given their truly transformative nature and their abil-
ity to serve as a platform for any number of vertical applications.
Fans of Netflix's "Stranger Things" know that the Upside Down is
alternative dimension that looks like our world, but much darker, cold-
er, foggier, and dangerous and inhabited by monsters.
In our view, technology investors likely feel as though they are in
"the Upside Down" relative to AI, VR, and AR in that the best posi-
tioned companies are not pure plays in these areas, but rather mega-
cap technology companies like Amazon (covered by CIO Americas,
Wealth Management consumer discretionary sector strategist Robert
Samuels), Google, Facebook, and Microsoft. Unlike prior technology
cycles (the internet build out and the dot com era of the '90s, the rise
of internet advertising in the early '00s, and the rise of cloud comput-
ing and software-as-a-service in the past decade), there are no pure
plays in AI, VR, or AR.
As frustrating as the lack of pure-play investments might seem, this
ironically may be for the best from an investment perspective. While
these technologies are undoubtedly important, there is a long history
of transformative technologies that held almost unbounded promise
but yet proved to be catastrophic investments. The dot com era left
a trail of wreckage in its wake, ranging from telecom bankruptcies,
90%-95% declines in the market cap of many optical equipment
companies, to wholesale purging of many e-commerce companies.
Even if an investor picked the ultimate winner in these pure plays,
investment success proved to be a long-term process: an investment in
Amazon on 31 December 1999 did not breakeven versus the S&P 500
(including dividends) until late 2004 and shareholders had to endure
relative underperformance of approximately -85% during that time
period and additional underperformance of -65% from late 2004
through mid-2007.
UBS Chief Investment Office Americas, Wealth Management 11 January 2018 11US Equities Information Technology
9. Mega cap technology companies may not be pure plays on
AI, VR and AR, but they have the best "real options".
Some pundits refer to AI as potentially mankind's last invention. VR
also holds significant promise across gaming, entertainment, educa-
tion, design, medicine, and retail.
However, as noted previously, we believe that the leading companies
in these fields are often the mega-cap technology companies. As seen
in Figure 10, Microsoft and Google were the first and eighth most
frequently cited source for AI research papers.
Fig. 10: Most quoted AI research papers by source
2012 - 2016
Rank Organization Quote
1 Microsoft 6,528
2 Nanyang Technological University 6,015
3 Chinese Academy of Sciences 4,999
4 CNRS 4,492
5 Carnegie Mellon University 4,389
6 University of Toronto 4,315
7 Massachusets Institute of Technology 4,283
8 Google 4,113
9 Tsinghua University 3,851
10 New York University 3,506
Source: Asian Nikkei Review
Although Amazon and Facebook do not appear in this list, we
nonetheless believe that both companies have made significant
investments in AI.
In our view, investors cannot hold a positive view on the leading
technology companies based solely on their positioning within AI,
AR, or VR with any reasonable investment time horizon as there
are simply too many other variables at play. For instance, Google is
well recognized for its AI capability and we would argue that AI is
woven throughout Alphabet's business. However, investment returns
for GOOGL/GOOG over the next few years will likely be driven by fac-
tors other than AI: the ongoing transition of traditional advertising to
digital, traffic acquisitions costs (i.e., the amount that Google pays its
advertising partners), cost controls, and overall execution.
We nonetheless believe Google's positioning in AI is a true asset to
the company. In our view, investors should view Google's, Microsoft's,
and other large cap technology companies' AI strengths through the
view of "real options".
Similar to financial options like puts or calls, real options are the ability
of companies to make business decisions, such as investing in a new
line of business, pursuing acquisitions, or research and development
(R&D). In essence, real options are the ability of a company to drive
its business. Real options are grounded in a company's management
ability, market positioning, access to capital, access to talent, and oth-
er tangible and intangible factors.
UBS Chief Investment Office Americas, Wealth Management 11 January 2018 12US Equities Information Technology
In our view, mega-cap technology companies such as Alphabet (the
holding company for Google), Facebook, Microsoft, and others are
"long" real options by virtue of their sheer scale, their access to tal-
ent, proven management ability, and ability to invest in R&D and sub-
sequently bring products to market.
The concept of real options is not new; it was popularized in the late
1990s during the "dot com" era. In some cases it was abused is as
much that real options were sometimes used to justify stock excessive
valuations.
However, we believe that valuations today of many large cap tech-
nology companies do not reflect their real options. For example, con-
sensus estimates call for Alphabet to grow earnings by approximately
a 20% CAGR over the next few years and the shares trade at 27x
forward earnings. In our view, this seems to give little to no credit to
Google for its strong positioning in AI (as seen in the figure above),
against a USD 15.7tn 2030 market opportunity (as estimated by PwC).
The bottom line is that although mega-cap technology companies
may not be directly investable because of AI, AR, or VR, shareholders
are long "free" real options since the market does not seem to be
factoring these into valuations.
10. With great data comes great responsibility...and greater
regulatory risk.
We know we're not the first to make this statement, but data is the
new oil. Data becomes a more important corporate asset with every
passing day. In our view, the large global internet companies sit atop
some of the richest piles of data as a result of consumers' web brows-
ing, video consumption, email, ecommerce, and social media posts,
along with user bases that are in the billions globally.
As evidenced by recent discussions and actions, regulators apparently
agree. The General Data Protection Regulation goes into force on 25
May 2018 in Europe. This new law establishes a higher level of respon-
sibility for the custody and protection of personal data, along with
new remedies against companies that abuse personal data. Penalties
can be severe, with penalties of EUR20mn or up to 4% of global rev-
enue, whichever is greater.
At the same time, there is increasing concern among lawmakers and
regulators in regard to the reach and scale of internet platforms rela-
tive to media content and news. German regulations took effect on
1 January 2018 requiring social platforms to remove criminal content
within 24 hours, with fines of up to EUR 50mn for non-compliance.
Facebook and Twitter have until 18 January 2018 deadline to comply
with a British investigation of "fake news" during Brexit campaign.
Google paid a USD 2.8bn fine to the European Union after regulators
determined it illegally promoted its own price comparison services in
searches, and the company faces two more continuing investigations
related to its alleged dominance in search advertising and its owner-
ship of the Android mobile operating system.
UBS Chief Investment Office Americas, Wealth Management 11 January 2018 13US Equities Information Technology
We expect regulatory risk to be heightened for the foreseeable future
as politicians, regulators, and courts worldwide wrestle with issues
related to the internet companies' collective dominance. Although we
believe the probability of structural remedies such as a breakup or
divestiture are remote, we nonetheless believe that greater regulato-
ry risk will serve as an overhang to sentiment and likely limit any P/
E multiple expansion. With multiples held constant, stock price per-
formance will be driven by earnings growth, which we believe will
remain healthy.
Fig. 11: Alphabet (GOOGL) and Facebook P/E multiples
70
P/E vs. Next 12 Month
Consensus Estimates
60
50
40
30
20
10
0
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18
GOOGL FB
Source: FactSet, UBS
We continue to have a Most Preferred view on Alphabet, the holding
company for Google. We believe the company should benefit from
the continued transition to digital advertising, solid cost controls, and
the potential for additional capital returns. Additionally, we think the
company has an underappreciated position in cloud and AI.
UBS Chief Investment Office Americas, Wealth Management 11 January 2018 14US Equities Information Technology
11. Cloud spending remains vibrant, and hybrid is moving into
the mainstream.
Public cloud revenues have grown at a 35% CAGR over the past three
years to USD 105bn in 2017E, based on estimates by industry analyst
Gartner. After nearly a decade of discussion and the Amazon Web
Services (AWS), Microsoft's Azure and Office365, and software-as-a-
service (SaaS) pure plays Salesforce.com, Workday, and ServiceNow,
and others, we believe there is almost a level of fatigue with cloud
computing as an investment theme.
However, we believe cloud computing is still in the early days. Gartner
projects public cloud spending will grow at a 23% CAGR over the
next three years. We believe this could be conservative as it still would
amount to only 10% of global enterprise IT spending (software + data
center systems + IT services).
Fig. 12: Gartner public cloud computing forecasts
250
Cloud Spending, USD mn
200
150
100
50
0
2014 2015 2016 2017E 2018E 2019E 2020E
SaaS PaaS IaaS
Source: Gartner, UBS
We believe that one reason IT spending is improving is because enter-
prise IT departments have increased clarity and confidence around
their cloud strategies. Cloud adoption is moving well beyond ear-
ly adopters, start ups, and dev-ops (i.e., software development and
operations) and into more mission critical workloads. Security is still
a paramount concern, but cloud service providers have made strong
progress on data rights management issues while maintaining and
admirable record on breach protection.
While public cloud (i.e., Amazon AWS, Microsoft Azure) and private
cloud (i.e., a multitenant data center owned and operated by a cor-
poration) for the are fairly well accepted computing constructs, we
believe hybrid cloud computing will drive the next wave of cloud
adoption as it becomes a mainstream cloud strategy. Hybrid cloud
uses a mix of on-premise private cloud resources along with office-
premise third-party public cloud resources. Hybrid cloud can deliver
multiple benefits including better IT asset utilization, improved agility,
and security. Additionally, a hybrid cloud strategy can protect against
vendor lock-in, a non-trivial concern given past experiences and the
criticality and cost of technology operations.
UBS Chief Investment Office Americas, Wealth Management 11 January 2018 15US Equities Information Technology
As seen in the graph below, a survey by Rightscale (a provider of cloud
management tools) indicates that 85% of survey respondents plan
on pursuing a multi-cloud strategy, with 58% intending to pursue a
hybrid cloud strategy. We believe this supports the strong growth in
hybrid cloud forecasted by industry analyst IDC, which expects hybrid
cloud to increase to more than USD 21bn by 2021 from approximately
USD 12bn in 2017.
Fig. 13: Cloud strategy survey
Single public, Single
9% private, 5%
No plans, 1%
Multiple
private, 7%
Hybrid cloud, Multiple
58% public,
20%
Source: Rightscale, UBS
In our view, legacy IT vendors such as Cisco should benefit from hybrid
cloud adoption. We also see select IT consulting companies such as
Accenture as well-positioned to capitalize on the continued migra-
tion to the cloud and ramping hybrid cloud adoption. Red Hat should
benefit from its leading position in OpenStack and OpenShift, which
both provide key management tools for cloud computing environ-
ments. We also believe Intel and Micron should benefit from contin-
ued cloud data center server investment as well as stable to better
demand trends for on-premise servers.
UBS Chief Investment Office Americas, Wealth Management 11 January 2018 16US Equities Information Technology
12. The digital world is (still) a dangerous place.
After a stellar run from 2012 to 2015, many cyber security stocks
have underperformed the S&P 500 and the IT sector. However, the
digital world continues to be a dangerous place. As seen in Figure 14,
security breach activity in the US remains elevated. The most recent
spike in breaches is due to the Equifax hack of September 2017 in
which the data of over 145mn consumers was compromised.
Fig. 14: US cyber security breaches - number of records compromised
in millions
160
140
120
100
80
60
40
20
0
1Q05 3Q06 1Q08 3Q09 1Q11 3Q12 1Q14 3Q15 1Q17
Number of records breached (mn)
Source: Privacy Rights Clearinghouse, UBS
The fundamental backdrop still, unfortunately, remains positive for
cybersecurity vendors. Hacking has evolved from simple "script-kid-
dies" pulling cyber-pranks to impress their friends to sophisticated
organized crime operations, nation-state actors, and politically-moti-
vated "hacktivists". This should support continued increases in IT
security budget. As seen in Figure 15, industry analyst Gartner fore-
casts the cyber security market to grow 8% in 2018.
Fig. 15: IT security spending
120
Security Industry Revenue (USD, bn)
100 Consumer Security
Software
80 Security Services
60 Network Security
Equipment
40 Infrastructure Protection
20 Identity Access
Management
0
2016 2017E 2018E
Source: Gartner, UBS
However, as can also be seen in Figure 15, the composition of spend-
ing is changing. Chief Security Officers (CSOs) increasingly recognize
that breaches are practically inevitable. Rather than focusing primarily
UBS Chief Investment Office Americas, Wealth Management 11 January 2018 17US Equities Information Technology
on prevention (which drove outsized growth in firewalls that protect
the perimeter over the past few years), CSOs are pivoting to focus on
detection and remediation. At the same time, CSOs are dealing with
"too much technology" (i.e., too many vendors, too many security
platforms) and too few people.
Putting it all together, we believe security spending will increasingly
be driven by analytics and monitoring. Additionally, security services
spending should benefit. Lastly, we expect to see consolidation with
security on two fronts. First, we believe vendors that can consolidate
adjacent security functions will be significant share gainers as consol-
idation allows CSOs to address "too much technology" and leverage
scarce (and expensive) security professionals. Second, we expect there
will be significant consolidation in the security space as vendors race
to provide more of an integrated security platform. Firewall spending,
which has decelerated sharply, will likely remain tepid for some time,
though we note that firewall vendors are well positioned to play the
role of consolidators of both adjacent technology and security com-
panies.
In our view, Splunk is incredibly well-positioned for the increasing use
of analytics in security. The company is a leading provider of software
used to capture and analyze data from IT operations; this is a critical
capability that addresses a true pain point for CSOs. We continue
to believe Cisco's (Most Preferred) is well positioned in security and
the company will likely continue to make smart acquisitions in this
space to further provide integrated solutions. Additionally, by virtue
of its dominance in enterprise network infrastructure, the company
should be able to drive real product synergies across the networking
stack. Lastly, firewall vendors Palo Alto Networks and Fortinet (both
on our Beneficiaries of Transformational Technologies list) certainly
face headwinds from slowing firewall demand, but at the same time
are well positioned to play the role of consolidators.
UBS Chief Investment Office Americas, Wealth Management 11 January 2018 18US Equities Information Technology
13. Dust off your Commodore 64 - PCs are back!
After five years of continuous unit declines, we believe PCs will return
to growth in 2018. To be clear, growth will be modest, but the benefits
to PC semiconductor providers should be substantial as a five year
headwind is now neutralized.
Fig. 16: Global PC units
400 15%
350
10%
Annual growth
300
PC units (mns)
5%
250
200 0%
150
-5%
100
-10%
50
0 -15%
2008 2010 2012 2014 2016 2018E
PC units (mns) Annual growth
Source: Gartner, UBS
In our view, PC demand is improving due to several factors. First, an
aged installed base is ripe for upgrade just as Windows 10 begins
to see corporate adoption. PC manufacturers have developed inno-
vative form factors that combine the content creation capabilities of
a full fledged computer along with the content consumption ease of
a table. Additionally, we believe the tablet market "experiment" of
substituting tablets for PCs has largely proven to be a failure, with
tablet functionality being subsumed into the convertible PC form fac-
tor. Lastly, the increasing adoption of "phablets" (large screen smart-
phones) lessens the need for a dedicated tablet device.
We may never again see the glory days of the Commodore 64 era,
but we nonetheless believe the PC industry has finally stabilized. Intel,
which has dominant share in PC processors, should be an outsized
beneficiary along with Micron, as DRAM demand should be support-
ed by a stable PC market.
14. Peak smartphone is upon us.
It's not just you. Everyone walking through Manhattan, San Francisco,
Chicago, and Boston has their face buried in their smartphones. (Los
Angelinos are in their cars.) The same holds true in many major cities
across the world.
We believe the world is approaching "peak smartphone" due to
a combination of developed market saturation and inherently low-
er average selling prices in the emerging markets. Industry revenue
growth has slowed to mid-single digits (off a very soft -1% in 2016)
after growing at a 23% CAGR over the past decade.
As seen in Figure 17, industry revenue is expected to reaccelerate to
12% in 2018 before posting actual declines in 2019 and 2020. Unit
growth should remain tepid in the low single digit range (see Figure
18), while ASPs are expected to increase sharply in 2018 (see Figure
19). We believe there is significant risk to these estimates.
UBS Chief Investment Office Americas, Wealth Management 11 January 2018 19US Equities Information Technology
Fig. 17: Global smartphone revenue
400,000 80%
350,000 70%
300,000 60%
Revenue, USD mn
50%
250,000
y/y % change
40%
200,000
30%
150,000
20%
100,000 10%
50,000 0%
0 -10%
2008 2010 2012 2014 2016 2018E 2020E
Revenue y/y % change
Source: UBS as of 20 November 2017
Fig. 18: Global smartphone units
1,600 80%
1,400 70%
1,200 60%
1,000 50%
y/y % change
Units, mn
800 40%
600 30%
400 20%
200 10%
0 0%
2008 2010 2012 2014 2016 2018E 2020E
Smartphones y/y % change
Source: UBS as of 20 November 2017
Fig. 19: Global smartphone average selling prices
Source: UBS as of 20 November 2017
450 10%
400
5%
350
300 0%
y/y % change
250
ASP in USD
-5%
200
150 -10%
100
-15%
50
0 -20%
2008 2010 2012 2014 2016 2018E 2020E
ASP y/y % change
Source: UBS as of 20 November 2017
Beyond 2018, we see unit growth in developed markets facing head-
winds from saturation, as smartphones account for a very high per-
centage (often 80%+) of the subscriber base in the United States,
Germany, France, the United Kingdom, Spain, Italy, Japan, Sweden,
Norway, Finland, and the Netherlands. In these markets we believe
the replacement rate of the installed base will continue to extend as
less innovation is brought to market and consumers hold on to their
phones for longer periods of time.
UBS Chief Investment Office Americas, Wealth Management 11 January 2018 20US Equities Information Technology
Emerging markets such as India offer unit growth opportunities, but
often at the cost of significantly lower average selling prices. We
believe this is not a function of consumer preferences, but simply
reflects telecom service providers' and consumers' economics. For
instance, the average monthly revenue per user for the major Indi-
an telecom carriers is less than USD 3/month. This compares to USD
35-45 in the US and USD 7-9 in China. In our view, this low revenue
rate means that consumers are constrained in their ability to purchase
high-end devices and carriers are similarly unable to subsidize devices
in any meaningful way.
15. 5G - Even sooner than we thought.
5G is the next phase in the evolution of wireless technology. As with
prior generations, 5G will enable faster wireless broadband speeds
at lower costs. Importantly, when fully implemented, 5G is expect-
ed to enable new applications such as autonomous driving, massive
internet of things ( IoT), and telemedicine, among others. In the more
intermediate-term, 5G will be deployed first as an alternative broad-
band access technology, with this "third pipe" of fixed wireless access
potentially enabling new competition.
In 5G: Sooner than you thought, different than you imagined, 22
March 2017, we wrote that:
"Although widespread adoption of mobile 5G wireless
remains a few years away, the wireless industry is moving
quickly and field trials of 5G fixed wireless access are planned
for this year."
It turns out that 5G is arriving even sooner than we expected. AT&T
announced on 4 January 2018 its plan to mobile 5G in a dozen
markets by the end of this year. Additionally, long-time 5G skeptic T-
Mobile US announced its intent to have a "real, mobile nationwide 5G
network" (as opposed to fixed wireless access) by 2020. We believe
it is highly likely that T-Mobile may accelerate this schedule if AT&T's
5G efforts show early signs of success.
Meanwhile on the fixed access front, Verizon confirmed it will launch
a 5G offering to provide internet services in Sacramento CA in late
2018 with additional trials in other cities.
UBS Chief Investment Office Americas, Wealth Management 11 January 2018 21US Equities Information Technology
Fig. 20: Mobile Technologies
1G 2G 3G 4G 5G
Adds to 4G use cases:
Wireless speeds up
to 1Gb/second
Massive Internet of
Things (IoT)
4K video
Connected cars
Telemedicine
Mission critical
networks
Source: UBS
16. Communications equipment is poised for a comeback.
The communications equipment industry is the worst performing
group in the S&P 500 IT sector over the past 1, 3, 5, and 10 year peri-
ods. The industry has been pressured by increasing standardization
and the rise of Chinese vendors such as Huawei and ZTE. Increasing
standardization has decreased vendors’ ability to differentiate their
products and therefore earn attractive margins. The Chinese vendors
for many years were focused on growth over profits and as a result
brought significant pricing pressure to the market. Additionally, many
companies have extended the useful life of switching gear, which
resulted in yet another headwind to growth.
Fig. 21: Total returns
indexed to 100 as of 31 Dec. 2007
350
300
250
200
150
100
50
-
'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17
S&P 500 IT Sector S&P 500 S&P 500 Comm Equip.
Source: FactSet, UBS
However, we believe 2018 may finally mark an inflection for comm
equipment providers. While the competitive environment is still neu-
tral at best, we see multiple reasons for optimism this year. Global
carrier cap ex will most likely decline in 2018, but annual compar-
isons improve in 2H18 (and the US is already improving; see Figure
22). At the same time, we believe carriers will begin initial 5G net-
work builds and rollouts. While this may not yet be significant rev-
enue opportunity, we believe 5G successes should carriers' spending
UBS Chief Investment Office Americas, Wealth Management 11 January 2018 22US Equities Information Technology
plans for 2019 and improve sentiment towards the communications
equipment group.
Fig. 22: US carrier capital expenditures
60,000
Capital Expenditures, USD mn
50,000
40,000
30,000
20,000
10,000
0
2011 2012 2013 2014 2015 2016 2017E 2018E
AT&T Verizon Sprint T-Mobile USA CenturyLink*
* CenturyLink data adjusted for its acquisition of Level 3
Source: FactSet, UBS
Additionally, we believe enterprise investment will improve as busi-
nesses (finally) begin to upgrade their network infrastructures to take
advantage of new services. These new offerings include as SD-WAN
(a new networking product/technology used to provide connections
to branch offices and data centers at low costs over large distances);
new software defined networking solutions for the data center; and
new demand drivers from industrial applications and the IoT.
In our view, Cisco should be a beneficiary of improving enterprise
demand, new product cycles, and new demand drivers. Juniper Net-
works should benefit from improving carrier spending and contin-
ued investment by cloud service providers. Finally, we believe Ericsson
and Nokia (both of which are on our Beneficiaries of Transformational
Technologies list) will benefit from continued 4G investment and the
upcoming ramp in 5G spending.
UBS Chief Investment Office Americas, Wealth Management 11 January 2018 23US Equities Information Technology
17. We're semi-interested in semiconductors.
The semiconductor industry is much more diversified today when
compared to prior cycles, a clear positive for a notoriously cyclical
industry. However, we're only semi-interested in semiconductors at
this time due to valuations that seem to largely ignore the risks of a
cyclical downturn, or even the revenue slowdown anticipated by both
the Semiconductor Industry Association and consensus estimates.
Fig. 23: Semiconductor industry revenue
500
450
Revenue, USD in billions
400
350
300
250
200
150
100
50
-
2005 2007 2009 2011 2013 2015 2017E
Global Semiconductors Semiconductors ex-Memory
Source: Semiconductor Industry Association, UBS
As seen in Figure 23, the global semiconductor industry is expected
to grow 7% in 2018 to USD 437bn, a marked deceleration from the
21% growth expected for 2017. This slower growth rate is primarily
due to a more stable pricing environment in memory. Although we are
still constructive on the memory market (discussed in detail below),
we nonetheless believe that a repeat of the exceptionally strong pric-
ing environment of 2017 is unlikely; we estimate that higher prices
accounted for roughly half the increase in memory industry revenues.
Analog semiconductor companies have been some of the strongest
performers of this cycle. The analog group has benefitted from
increasing demand across a swath of industries, the benefits of con-
solidation, and strong operating leverage. This has driven significant
earnings growth and P/E multiple expansion.
However, as seen in Figure 24, earnings growth estimates have been
declining (now 11% for 2018), while P/E multiples are near five year
highs.
UBS Chief Investment Office Americas, Wealth Management 11 January 2018 24US Equities Information Technology
Fig. 24: Analog semiconductor group
TXN, SWKS, QRVO, ADI, LLTC, MXIM
30% 23x
22x
Earnings Growth
25%
21x
20x
P/E
20%
19x
15% 18x
17x
10%
16x
5% 15x
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Earnings Growth P/E
Source: FactSet, UBS
Rather than fully valued analog names with expected decelerating
earnings growth, our preference is for semiconductor companies with
low valuations and prospects for cyclical earnings improvement and
"real options" as discussed earlier. In this vein, we believe Intel is
well positioned. The company should benefit from a stable PC mar-
ket (a first in five years), continued strong demand from cloud ser-
vice providers, and strong gains in its communications chip business.
Additionally, we believe Intel has real options in autonomous driving
(through its Mobileye acquisition) and in AI, where we believe com-
pute demand will increase. Lastly, the stock trades at a 14x P/E versus
consensus next twelve months earnings, which is a 25% discount to
the semiconductor group average and offers 2.6% dividend yield.
18. Memory - it's not different this time...but it is different at
this time.
Prices for DRAM and NAND memory were incredibly strong in 2017,
as seen in Figure 25.
Fig. 25: DRAM Spot Pricing
USD 5.00
USD 4.50
USD 4.00
USD 3.50
USD 3.00
USD 2.50
USD 2.00
USD 1.50
USD 1.00
USD 0.50
USD 0.00
Mar-13 Mar-14 Mar-15 Mar-16 Mar-17
DRAM Spot Pricing
Source: Bloomberg, UBS
Our memories of prior memory cycles make us say that it's not "dif-
ferent this time", but it is "different at this time". What's different
at this time? Industry consolidation has lead to a newfound capacity
UBS Chief Investment Office Americas, Wealth Management 11 January 2018 25US Equities Information Technology
discipline, which has resulted in a better supply balance. At the same
time, demand drivers are less reliant on PCs as seen in Figure 26.
Fig. 26: DRAM industry revenue by end market
100%
% of DRAM Industry Revenue
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2009 2010 2011 2012 2013 2014 2015 2016 2017
Mobile phones PCs Servers Tablets, eReaders Gaming Auto Other
Source: Bloomberg
We believe the supply/demand balance will remain healthy for the
next few quarters, particularly in DRAM. PCs as a demand driver
has been replaced by smartphones, a category we are cautious on.
In the near- to intermediate-term, increasing memory density (i.e.,
the amount of memory per device) should counteract slowing unit
growth, but longer-term we expect bit demand from mobile devices
to flatten out. Servers should continue to be strong as cloud service
providers deploy very memory-dense servers and automotive should
continue to consume more bits. This demand drivers are construc-
tive to the longer-term picture, but we would not be surprised to see
another memory downturn towards the end of 2018.
We believe Micron is attractive at current levels given its positioning
in DRAM, continued capital and cost dividend. The stock trades at
less than 5x consensus next 12 months estimates, and we believe
estimates are likely understating the earnings power for 2018.
UBS Chief Investment Office Americas, Wealth Management 11 January 2018 26US Equities Information Technology
Appendix
Statement of Risk
Equities - Stock market returns are difficult to forecast because of fluctuations in the economy, investor psychology,
geopolitical conditions and other important variables.
Terms and Abbreviations
Term / Abbreviation Description / Definition Term / Abbreviation Description / Definition
1H, 2H, etc. or 1H11, First half, second half, etc. or first half 2011, 1Q, 2Q, etc. or 1Q11, First quarter, second quarter, etc. or first quarter
2H11, etc. second half 2011, etc. 2Q11, etc. 2011, second quarter 2011, etc.
2011E, 2012E, etc. 2011 estimate, 2012 estimate, etc. A actual i.e. 2010A
CAGR Compound annual growth rate E expected i.e. 2011E
EPS Earnings per share GDP Gross domestic product
Market cap Number of all shares of a company (at the end of NAV Net asset value
the quarter) times closing price
P/E Relative P/E relative to the market Shares o/s Shares outstanding
WMR UBS Wealth Management Research CIO UBS Chief Investment Office
x multiple / multiplicator YTD Year-to-date
Required Disclosures
Analyst Certification
Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with
respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect
his or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be,
directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research
report.
Companies mentioned in this report (11 January 2018):
Cisco Systems Inc. (CSCO - Most Preferred, $40.10), Ericsson (ERIC - , $6.89), Fortinet, Inc. (FTNT - Bellwether, $44.26),
Alphabet Inc. Class A (GOOGL - Most Preferred, $1,112.05), Intl Business Machines (IBM - Least Preferred, $164.20),
Intel Corp. (INTC - Most Preferred, $43.41), Juniper Networks Inc. (JNPR - Most Preferred, $28.76), Micron Technology
(MU - Most Preferred, $42.82), Nokia (NOK - , $4.82), Palo Alto Networks (PANW - Not Rated, $154.16), Red Hat (RHT
- Most Preferred, $126.16), Splunk (SPLK - Most Preferred, $89.45), AT&T Inc. (T - Most Preferred, $36.48), Verizon
Communications Inc. (VZ - Least Preferred, $52.11)
CIO Americas, Wealth Management equity selection system
Equity sector strategists provide three equity selections: Most Preferred (MP), Least Preferred (LP) and Bellwether
designation.
Rating definitions
Most Preferred*: The equity sector strategist expects the stock to outperform the relevant benchmark in the next 12
months.
Least Preferred*: The equity sector strategist expects the stock to underperform the relevant benchmark in the next
12 months.
Bellwether: Stocks that are of high importance or relevance to the sector and which the equity sector strategist expects
the stock to perform broadly in line with the sector benchmark in the next 12 months.
*A stock cannot be selected as Most Preferred if UBS Investment Research rates it a Sell, while a UBS Investment Research
Buy rated stock cannot be selected as Least Preferred.
Restricted: Issuing of research on a company by CIO Americas, WM can be restricted due to legal, regulatory, contractual
or best business practice obligations which are normally caused by UBS Investment Bank’s involvement in an investment
banking transaction in regard to the concerned company.
UBS Chief Investment Office Americas, Wealth Management 11 January 2018 27You can also read
