Kevin Dennean, CFA, Technology Equity Sector Strategist …€¦ · Chief Investment Office Americas, Wealth Management Kevin Dennean, CFA, Technology Equity Sector Strategist Americas,

UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be awarethat the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider thisreport as only a single factor in making their investment decision.

US Information TechnologyEquity preferences | 25 September 2018

Chief Investment Office Americas, Wealth ManagementKevin Dennean, CFA, Technology Equity Sector Strategist Americas, [email protected]

Sector View: Neutral

Strategy: Our equity strategy team recommends a neutral alloca-tion to the sector, reflecting our expectations for a modest improve-ment in IT spending by corporations, but balanced by challenges insmartphones and a premium valuation relative to the S&P 500.

Our positioning within the sectorOur Most Preferred stocks generally reflect companies that are ben-efiting from the secular shift to cloud-based computing, increasedspending on security, and those without significant reliance on lega-cy revenues. We have less favorable views of companies that gen-erally have high exposures to legacy revenue streams as we expectthese will be under pressure as customers migrate to more modernIT architectures.

Software & Services: Most PreferredWe are constructive on software companies that are either “cloud-native” or are successfully managing the transition to the cloud.Select services companies should benefit from increased consultingdemand for cloud and digital strategies.

Technology Hardware & Equipment: NeutralAlthough IT Hardware companies have been among the mostimpacted by the move to the cloud and slack business demand,we nonetheless see areas of strength in some areas of enterprisehardware and networking equipment. After five to six years ofrelentless declines, we believe the PC market is finally stabilizing.Smartphone growth will likely remain muted due to saturation.

Semiconductors & Semiconductor Equip.: NeutralHealthy semiconductor demand is fully reflected for some richlyvalued names in the space. We prefer semiconductor companieswith modest valuations levered to the PC and server markets.

Name Ticker PriceMost PreferredAccenture Plc ACN 172.82Adobe Systems ADBE 267.84Cisco Systems Inc. CSCO 48.47HP Inc. HPQ 25.56Intel Corp. INTC 45.91Juniper Networks Inc. JNPR 29.79Microsoft Corp. MSFT 114.45Oracle Corp. ORCL 51.72Red Hat RHT 135.56Salesforce.com CRM 158.87Splunk SPLK 117.47

Bellwether ListAkamai Technologies AKAM 72.83Apple Inc. AAPL 222.19Applied Materials Inc. AMAT 38.58Broadcom Corp. AVGO 247.65Cognizant Technology CTSH 76.82Corning GLW 35.51Fortinet, Inc. FTNT 89.51Hewlett Packard Enterprise HPE 16.55Intl Business Machines IBM 148.91LAM Research Corp. LRCX 151.29Micron Technology MU 44.64Qualcomm Inc QCOM 72.74TE Connectivity TEL 89.38Texas Instruments Inc. TXN 107.55VMware, Inc VMW 158.06

Source: Bloomberg, UBS as of 25 September 2018

Sector benchmark: S&P Information Technolo-gy Index

This report has been prepared by UBS Financial Services Inc. (UBS FS). Analyst certification and required disclosuresbegin on page 46.

A somewhat slimmer technology sectorEffective 21 September, index providers MSCI and S&P moved com-panies in the Internet Software & Services (e.g. Alphabet, the holdingcompany of Google, and Facebook) and Home Entertainment Soft-ware (video game companies such as Activision, Electronic Arts, andTake Two Interactive) industry groups from the Information Technolo-gy sector and into the newly formed Communication Services sector.

The index providers are making these changes to better reflect thecontinuing convergence of the telecom and media sectors. We notethat while Alphabet and Facebook are typically thought of as "techcompanies" their business models are centered on advertising. Sim-ilarly, although video game companies are thought of as softwarecompanies, in some ways the video game industry has evolved tolook much more like the traditional movie business. Video games areincreasingly focused on a few key franchises that are updated everyyear, much the same as major studies leverage movie franchises witha seemingly never-ending series of sequels and spin-offs. Additionally,the future of video game industry will focus much more on e-Sports,shifting the economics of the industry to more of a media-type model.

Standard and Poor's estimates that the IT sector's weight within theS&P 500 will decline from 26% to 20.9% as a result of these changes.From our perspective, we see the changes as increasing the IT sector'sexposures to traditional IT spending (e.g., hardware, software, andservices) to approximately 75% in the new constitution from 60% andsmartphones (Apple, Qualcomm, and a pro rata share of the semi-conductor group) to 25% from 20%.

Tariff impacts look limited, but second order effects loomThe news flow around President Trump's proposed tariffs has resem-bled nothing more than a game of ping pong, as threats of severeaction were frequently followed by more dovish commentary. Morerecently, the administration appears intent on moving forward with a10% tariff on USD 200bn of Chinese imports with a step-up to 25%in January 2019.

We see fairly limited direct input to the IT sector. Software and ser-vices companies have relatively little exposure to China. Hardware andsemiconductor companies have significant exposure, although Applehas already received an exemption.

The back of every iPhone box is imprinted with "Designed by Apple inCalifornia, assembled in China." This simple statement captures theessence of the technology supply chain: every piece of hardware fromPCs to smartphones to printers to servers to networking equipmenthas a supply chain that stretches from Silicon Valley to Shenzhen. Inour view, a tariff on IT products helps no one and hurts everyone,from consumers to US technology companies.

Fortunately, we believe the overall direct impact will be limited byexemptions and by sophisticated supply chains that can reroute trans-portation and in some cases even find substitute component sourcing.

More concerning, however, are the potential second-order effectsthat tariffs may have. For instance, slower economic growth in China

US Information Technology | Equity preferences

CIO Americas, WM 25 September 2018 2

may dampen demand for industrial goods, putting analog semicon-ductors at risk. Additionally, the management team's of many tech-nology companies have highlighted the potential knock-on effects tocorporate confidence and investment.

IT spending remains robustAgainst this backdrop of tariff-driven uncertainty, IT spending remainsrobust. Industry analyst Gartner expects IT spending (data center +enterprise software + devices + IT services) to grow 7.5% this year ver-sus 5.5% last year. Software is expected to see the strongest growthat nearly 9%.

Looking forward, we expect solid demand to persist as companiescontinue to modernize their IT architectures. Spending growth is fur-ther supported by an overall healthy global economy, solid revenuegrowth, and a strong profits cycle across many industries. Additional-ly, the continual need to defend against cyber attacks is driving bothsecurity spending and modernization efforts.

In our view, cloud spending is still in the early innings. Gartner pre-dicts 28% of key enterprise IT spending will be in the cloud by 2022,compared to 19% in 2018. The cloud transition will be strongest insoftware; Gartner expects as much as 40% of application software tobe cloud based by 2022 (vs. roughly 33% today), and 20% of infra-structure software to be in the cloud (vs. 13% today).

While the transition to the cloud is an overarching trend in technology,there will still be significant spending on traditional, or on-premise,technology products and services. Companies are moving to the cloudas much for agility and business enablement (i.e., the ability to quicklyroll out new products or services) as for costs. Within this backdrop,companies are also discovering that certain IT processes are best runin-house with the ability use hybrid cloud as "flex capacity" or tocapitalize on third party expertise in situations that would otherwisebe cost-prohibitive. We believe growing adoption of hybrid cloud hasactually increased spending on traditional on-premise IT, as companiesno longer have to be concerned with stranded investments.

In our view, the strong IT spending environment provides a positivebackdrop for roughly 75% of the market cap of the information tech-nology sector, and in particular supports our Most Preferred viewson software and services companies (Accenture, Microsoft, Oracle,Adobe, Salesforce.com, Red Hat, and Splunk) and select hardwarenames (Cisco, Juniper). Healthy IT spending should also support Intel,which provides nearly all the CPU chips that power corporate PCs andservers, as well as almost all of the cloud data centers.

Smartphone market still tepidThe growth of the smartphone industry has been nothing less thanbreathtaking. In less than a generation, more than half the world'spopulation have a smartphone and many of us depend on them forour daily communications, entertainment, and work.

Industry analyst IDC remains bullish on the industry, with expectationsfor smartphones to post both unit and higher average selling prices(ASPs) to drive industry revenue to more than USD 500bn by 2022.



However, we believe the world is approaching "peak smartphone". Indeveloped markets smartphones appear to have saturated the marketwith penetration rates of more than 80% in the US and Japan, andnearly 70% in China. Emerging markets have seen slower adoption,but penetration is greater than 50% in markets in Latin America.

At the same time, replacement rates are lengthening as consumerstend to hold onto their smartphones for longer due to a lack of inno-vation. For example, replacement rates in the US have increased fromless than 2 years to 2.5-3 years and we believe trends are similar inother developed market regions. Emerging markets have been themain driver of incremental unit growth, but at average selling pricesthat are significantly below industry norms. We believe emerging mar-ket growth can continue, but the combination of lengthening replace-ment cycles in developed markets and lower ASPs in the emergingmarkets likely means that smartphone industry revenues are indeedat a peak.

Semiconductors strugglingIntel remains our sole Most Preferred semiconductor company. Whileenterprise spending is certainly a positive for the group, Intel is theprime beneficiary.

After almost two years of tightness, supply/demand in the memo-ry market looks to be moving more towards balance and pricing inthe memory market should experience a normal cyclical decline. Thememory industry should benefit from consolidation, so price declinesshould not be nearly as steep as in prior cycles. Micron has impliedthat they could earn as much as USD 4.00/share in annualized earn-ings in the trough of a downturn, a far cry from prior cycles. That said,we don't think memory stocks will outperform until there is betterclarity around the actual path of pricing and profitability.

Analog semiconductor manufacturers have benefitted from increasedcontent in autos and industrial products as both end markets becomemore digital. However, recent softness in some leading industrial indi-cators, concerns over global auto sales, and saber-rattling over tradewars on multiple fronts have increased investors' caution towards thegroup. We believe that the eventual impact of all three of these issuesmay be less than feared, but we remain cautious on analog semicon-ductor companies' valuation.

The semiconductor capital equipment industry (SCE) has become lesscyclical given the rise of fabless semiconductor manufacturing (i.e., abifurcation by which some semiconductor companies design but out-source the actual manufacturing to "fabs" such as Taiwan Semicon-ductor or Samsung Electronics). However, memory spending is still avolatile and significant portion of global semiconductor capital invest-ment. We there believe SCE companies are unlikely to materially out-perform until there is better visibility into the memory markets andmemory manufacturers capital spending.

Overall valuation looks neutral, but some pockets of opportu-nity



We see healthy attractive fundamentals for companies with high ITspending exposure. In our view, there is significant pent-up demandfor IT spending fueled by corporations' need to digitize their business-es. This typically focuses on projects related to Big Data, cloud com-puting, analytics, and e-commerce.

While fundamentals are attractive, valuations are a bit less compelling.P/E ratios across the various sub-industries in the IT sector appear tobe at about fair value relative to growth.

IT Services companies are currently trading near the high end of thehistorical five year valuation range, but this likely reflects growth thatis similarly on the high end of the past five year range. On a P/E togrowth, or PEG ratio, valuation appears to fairly reflect growth. Wecontinue to prefer Accenture in this group as we believe the companyis best positioned to benefit from the ongoing digitalization effortsof its customers while having relatively lower legacy exposures thanpeers.

Software companies are also currently trading near the high end ofthe historical five year valuation range, but this also likely reflectsgrowth that is on the high end of the past five year range. On a P/E to growth, or PEG ratio, valuation appears attractive relative to thepast five years and this underpins our preference for the Software &Services industry group. Within software, we continue to prefer thefollowing.

Microsoft should benefit from continued growth with expandingmargins in its Azure cloud business. Additionally, we think the compa-ny is in early days of "upselling" Office 365 customers to higher-endpackages. Lastly, we believe management will continue to focus oncost discipline and capital returns.

Oracle has been late in transitioning its business to the cloud. Addi-tionally execution has been uneven and disclosures are lacking rela-tive to peers. However, we believe the company will see a modestincrease in its software business (traditional + cloud), expand margins,and increase free cash flow. If this is correct, we view the current val-uation as simply too cheap for a growing software company.

Salesforce.com continues to grow its core customer relationshipmanagement cloud business at admirable rates even as it ramps up itsother offerings. We believe the company can compound its growthfor multiple years at more than 20% and expand margins and freecash flow.

Splunk is a pure play on Big Data and in our view, one of themost interesting assets in the technology sector. Valuation appearsstretched, but we think it fairly reflects the company's addressablemarket and execution.

Hardware companies are trading at the higher end of the historic fiveyear range despite lower than average growth, resulting in a PEG ratiothat looks a bit rich versus history. This is largely due to Apple, whoseshares are near the five year high water mark on valuation. Withinthe hardware industry we continue to prefer the following.

Red H at continues to grow its coreLinux server operating business atabove-market rates and is wellpositioned for growth in the hybridcloud. The near-term is challenged bylarger contract deals (ultimately apositive for the company) and a lowerbase of renewal business, but we believeboth of the near-term headwindsbecome tailwinds in early 2019.



Cisco should continue to benefit from a refresh cycle of its installedbase, new product cycles, and an increasing portion of revenue tied tosoftware. A richer mix of software over time should result in a higherpercentage of recurring revenue at higher margins, and ultimately, ahigher P/E multiple.

Semiconductors and Semiconductor equipment stocks appear cheapon both absolute levels and relative to growth. However, we remaincautious on the group given the inherent cyclicality that we believemay not be fully captured in consensus estimates, especially in thememory market. Our preferred semiconductor stock is Intel. Thestock has been pressured by concerns regarding share loss to com-petitor AMD, related concerns regarding Intel's manufacturing lead-ership, as well as the pending CEO change CEO. In our view, manyof these concerns are overstated and we believe this has created anattractive entry point for longer-term owners.

Software & Services

Software & Services stocks account for 50% of the market capitaliza-tion of the S&P 500 Information Technology Sector. The group is com-posed of three industries: Internet Software & Services, IT Services,and Software.

Our Most Preferred recommendation for the Software & Servicesgroup reflects our constructive view of major Internet Software & Ser-vices companies and our positive view on software companies thatare "cloud-native" or are managing the transition to the cloud well.

IT ServicesIT Services stocks account for 22% of the market capitalization ofS&P 500 Information Technology Sector. The group has year-to-dateperformance of +23.5% (vs +20.0% for the Information Technolo-gy sector and +11.2% for the S&P 500). Performance in the grouphas been mixed, with relatively weak performance from IT Consultingcompanies relative to Payment Processing and Financial Technologycompanies.

IT Services is a USD 900bn annual market based on estimates fromindustry analyst Gartner, and represents about 45% of total IT spend-ing. Industry analysts expect IT consulting and outsourcing to gainshare of overall IT budgets over the next few years due to increasedoutsourcing of IT functions and the need for consulting services relat-ed to cloud-based architectures, mobility, and security. Additionally,payment processors have seen strong growth as more transactionsbecome cashless, a trend we expect to continue.

One area that will serve as drag on IT Services is high exposure tolegacy Enterprise Resource Planning (ERP) software maintenance andsupport. ERP systems are large, complex, and mission critical. Thishistorically drove significant spending on implementation and ongo-ing support. However, as enterprises migrate to more modern cloudand Software-as-a-Service (SaaS) based solutions, revenue from lega-cy ERP support work will be at risk. Our individual stock preferencesreflect our expectations relative to this trend.

Jun ip er 's growth should accelerate in2019 due to a combination of improvedcarrier spending, continued growth withcloud service providers (such as Amazonand Microsoft), and new products. Higherrevenue growth against a much lower costbase should results in earnings growth thatis much higher than revenue.



SoftwareSoftware stocks account for 28% of the market capitalization of S&P500 Information Technology Sector and has year-to-date performanceof +31.2% (vs +20.0% for the Information Technology sector and+11.2% for the S&P 500). Performance has been mixed on a year-to-date basis, with systems software companies (typically operating sys-tem, database, and infrastructure software vendors) underperform-ing application software companies; video game software companieshave pulled back sharply over the past few months after outperform-ing the other software groups earlier in the year.

The software industry continues to benefit from increasing softwareinvestment relative to overall IT spending. This is fueled in part by con-stant improvements in standardized hardware and storage infrastruc-ture that have allowed companies to focus more on business solutions(software) rather than infrastructure (servers, storage, and network-ing). Additionally, hardware improvements have finally enabled thelong-awaited move to the cloud, which is having a significant impacton the software industry.

Many traditional software applications are moving to SaaS modelsin which the application runs in a data center off the customer’spremise on hardware owned by a third-party (e.g., the SaaS provideror a third party data center on its behalf) and is subscribed to ratherthan purchased. (Please see the Glossary for detailed definitions oftechnical terms.) Additionally, infrastructure software companies arealso embracing the cloud and are adapting their solutions to workacross private clouds (a data center owned by the customer), publicclouds (an IT environment in which a third party service provider ownsand manages the underlying IT infrastructure), and hybrid clouds (acombination of customer-owned, on-premise infrastructure and pub-lic cloud services from a third-party service provider).

Technology Hardware & Equipment

Technology Hardware & Equipment stocks account for 31% of themarket capitalization of the S&P 500 Information Technology Sector.The group is composed of three industries: Communications Equip-ment; Technology Hardware, Storage, & Peripherals; and Electron-ic Equipment, Instruments, and Components. Year-to-date perfor-mance of +27.4% has been driven primarily by gains in Apple, whichhas rallied back sharply due to March quarter results and June quarterguidance that simply were not as bad as widely feared.

Our Neutral view for the Technology Hardware & Equipment groupreflects our relative caution regarding the smartphone market partiallyoffset by valuations and a constructive view of select segments ofenterprise hardware.



Communications EquipmentCommunications Equipment stocks account for 5% of the marketcapitalization of S&P 500 Information Technology Sector and has year-to-date performance of +27.4% (vs +20.0% for the Information Tech-nology sector and +11.2% for the S&P 500).

The communications equipment industry has been pressured byincreasing standardization and the rise of Chinese vendors such asHuawei and ZTE. Increasing standardization has decreased vendors’ability to differentiate their products and therefore earn attractivemargins. The Chinese vendors for many years were focused on growthover profits and as a result brought significant pricing pressure tothe market. In our view, the industry has settled into a fairly neutralcompetitive environment. However, we believe there are still potentialrisks from the rise of new, disruptive technologies such as SoftwareDefined Networking and Networking Functions Virtualization, whichaims to make communications networks more agile and responsiveto changing needs. By the same token, we believe these disruptionswill create opportunities within the industry.

Perhaps counter-intuitively, we believe large established vendors maybe best positioned to capitalize on these new trends. Incumbency isa powerful competitive force in communications equipment. Largeenterprises and telecom carriers have invested massive amounts ofresources in terms of time, capital and effort to build operational soft-ware and processes. As much as an enterprise or a carrier may want toleap to the latest cutting edge technology node, the process is oftenmuch more evolutionary than revolutionary. For example, SoftwareDefined Networking was heralded “the next big thing” and a “Ciscokiller” when VMware paid USD 2.2bn to acquire privately-held Nicira.However, SDN still has not gained significant traction and the focushas shifted from hardware cost savings and commoditization to net-work programmability, agility, and security.

We believe demand will increasingly be driven by mobile video, whichCisco forecasts will grow 10-fold from 2014 to 2019, compared toan estimated 3-fold growth in overall internet traffic. Against this sol-id demand backdrop, vendors face pricing pressures that will contin-ue to dampen revenue growth. In this environment, we favor com-panies with scale and incumbency. Technology risks certainly exist forlarge incumbents, but we believe that carriers and large Enterprisecustomers will be fairly measured in adopting new technologies. Thiswill give incumbents the time required to develop or acquire new tech-nologies.

Electronic Equipment, Instruments, & ComponentsElectronic Equipment, Instruments, & Components stocks account for2% of the market capitalization of S&P 500 Information Technol-ogy Sector. The group has year-to-date performance of +5.3% (vs+20.0% for the Information Technology sector and +11.2% for theS&P 500).

The Electronic Equipment, Instruments, & Components industry isextremely fragmented, and serves very diverse end markets. Whilemany products in this area are commodity components seen in every



PC and cell phone, there are other very attractive parts of the mar-ket. The growing promise of the Connected Cars and the Internet ofThings (which will embed physical objects with sensors, communica-tions, and software to gather and share data) may offer significantopportunities for companies in this industry. However, in the near-term we believe the auto market may be challenging for the next fewquarters.

Technology Hardware, Storage, & PeripheralsTechnology Hardware, Storage, & Peripherals stocks account for 24%of he market capitalization of S&P 500 Information Technology Sectorand year-to-date performance of +29.6% (vs +20.0% for the Infor-mation Technology sector and +11.2% for the S&P 500).

Apple, the world’s most valuable company by market capitalization,dominates the Technology Hardware, Storage, & Peripherals industryas it accounts for 88% of the industry’s value. The sector is character-ized by short product cycles and significant pricing pressure outside ofApple, which continues to charge a material premium for its solutions.

Smartphones have changed the way we all interact, communicate,and live. These devices have achieved more than 80% penetrationrate globally in a bit more than 10 years, a pace that is unmatched inthe history of consumer electronics. However, growth is slowing andindustry profits accrue almost entirely to Apple. We expect longer-term shipment growth to be driven entirely by emerging markets,where ASPs are significantly lower and will limit industry revenuegrowth.

Recent data points from the PC supply chain have improved modest-ly and we believe PC demand may be stabilizing after five years ofdeclines. Beyond near-term dynamics and the potential for a Windows10 upgrade cycle, we believe the traditional PC market is still secu-larly challenged, but should grow industry revenues modestly basedon a combination of relatively stable ASPs and slight increases in unitdemand. Converged and convertible devices (i.e., tablets that can beused with an integrated keyboard or as traditional tablets) are likelyto continue to grow, but at the expense of traditional notebook anddesktop PCs. The tablet market is increasingly commoditized and isunlikely grow revenue due to a mix shift toward significantly lowerASP devices.

Server growth should be modest but still positive; as Enterprises movetheir IT infrastructure to the Cloud (public, private, or hybrid) serverscan run at higher utilization rates, dampening demand. Server virtual-ization, which uses a software layer to run multiple, separate instancesof an operating system on the same piece of hardware has also damp-ened demand for server units by consolidating workloads that other-wise would run on separate machines. Server virtualization is oftenused by large enterprise in their own data centers and by cloud serviceproviders. Lastly, enterprise hardware companies often derive signif-icant and profitable revenue streams for support of proprietary sys-tems. We believe this will likely see increased pressure as enterprisemove to cloud and open-source solutions.



Enterprise storage has been pressured by emerging technologies thatoffer lower-cost and easier to manage “scale-out” solutions versusthe historical “scale-up” solutions. Scale-up solutions were historical-ly expensive proprietary offerings with a high level of custom compo-nents and software. Scale-out solutions typically rely on less expen-sive industry-standard servers and often utilize opensource software.As more applications move to the cloud, incumbent scale-up ven-dors have adapted by offering new solutions, but often with lowermargins. Additionally, we expect cloud service providers, who oftenuse in-house designed storage based on open-source technology, willgain share and further erode the market for high-end enterprise stor-age.

Semiconductors & Semiconductor Equipment

Semiconductors & Semiconductor Equipment stocks account for 19%of the market capitalization of S&P 500 Information Technology Sec-tor and has year-to-date performance of +10.0% (vs +20.0% for theInformation Technology sector and +11.2% for the S&P 500).

Our Neutral recommendation for the Semiconductors & Semiconduc-tor Equipment group reflects our longer-term caution on industrygrowth prospects and valuation. That said, we do see some pocketsof opportunity in the PC and server markets.

Growth for the semiconductor industry has downshifted materiallyand we do not expect it to return to its former status as cyclical growthor “GDP+” industry. During the 1990s, semiconductor demand wasdriven by the rapid growth of the PC market, which grew at a 14%CAGR from less than 60 million units in 1995 to more than 200 mil-lion units in 2005 (based on data from industry analysts). PC growthsubsequently slowed to less than 3% from 2005 to 2015, based onestimates for 2015 PC shipments, and have contracted at a -5% rateover the past five years.

Cell phones were the next great driver of semiconductor demand,growing from approximately 410 million units in 2000 to 1.6 billionunits in 2010, a CAGR of more than 14% (based on data from indus-try analysts). Just as the feature phone market started to peak, theiPhone catalyzed the smartphone market in 2007 and smartphonesbecame the next great driver of semiconductor demand, with smart-phone units growing at a 34% CAGR from 2007–2016.

However, we believe smartphone unit demand is slowing rapidly dueto saturation. We estimate the installed base has now reached near-ly 3 billion units worldwide. Although there is room for incrementalpenetration growth, we believe most growth will come from Emerg-ing Markets with periods of increased demand from Developed Mar-kets due to replacement cycles. We expect both regions will see low-er average selling prices over time, and as a result, we expect smart-phones to drive less incremental demand for leading edge semicon-ductor content.

We believe the 2015 and 2016 flurry of mergers and acquisitions,which was the largest year for M&A in the semiconductor industry's



history, was driven by recognition of structurally slower growth andis motivated by the need to consolidate and reduce operating costs.Although these mergers will likely have a positive longer-term impact,we believe there is always material integration risk. Additionally, webelieve that near- to intermediate-term demand may undershootexpectations.

We do believe there are some interesting trends within the semicon-ductor industry. Electronic and semiconductor content is increasing inautomobiles driven by multiple factors including entertainment, safe-ty, and navigation, as well as electric and hybrid engines. Autonomousautomobiles may be some time off, but should hold tremendouspotential for semiconductors. However, as noted previously, we do seesome near-term headwinds for auto-exposed semiconductor compa-nies.

The Internet of Things will drive increased demand for sensors, whichwill collect vast amounts of data that can be analyzed. This data willhave to be transmitted, stored, analyzed, and monetized, all whilemaintaining data security. All of these steps may drive increased semi-conductor demand across networking, storage, and processing. Final-ly, although we believe smartphone growth is slowing, data consump-tion continues to grow significantly. We believe this should be a pos-itive for semiconductors in the communications space.

Key Themes

Transformational Technologies. We focus on two broad categoriesthat we believe will be key sources of technological innovation overthe next decade: digital data and smart automation. We look forcompanies that can capture or add value through the six stages ofdata’s lifecycle: creation, transmission, storage, processing, consump-tion, and monetization. We see Big Data as a still-emerging categorythat holds significant potential -- to capture, store, analyze, and mon-etize information of all sorts from an increasing number of sources.

Cloud. The move to the cloud is an evolutionary process that webelieve is only now beginning to gain real momentum with largeenterprise customers. While many traditional IT vendors are at risk oflosing high-margin revenue streams to public cloud providers, we dosee a number of companies that are capitalizing on the opportunity.

Underappreciated growth in Technology. We expect capitalinvestment and IT spending to recover in the coming quarters. Wesee the Technology sector as undervalued and underpinned by bothcyclical and secular growth. We see opportunities in secular categoriessuch as Big Data, security, and the move to the cloud. We also believeopportunities exist for established vendors who are pivoting success-fully to adjust to a changing IT landscape.

Security. Despite recent fears of overspending, we remain confidentthat security will gain significant share of overall technology budgets.At the same time, security models are evolving from prevention todetection and remediation. We believe there is significant opportunity



for industry consolidation and “platforming” of disparate technolo-gies and products.

Wireless. Smartphone industry units and revenues are slowing sig-nificantly after years of unprecedented growth due to saturation anda mix shift towards emerging markets, where average selling pricesare lower. At the same time, wireless data growth is growing dramat-ically driven by increasing penetration of 3G and 4G technologies andconsumption of mobile video. Mobile video and data consumption ishaving a significant impact on internet search and advertising.

Democratization of IT. In the past, there was a significant dividebetween the technology used by large enterprises and that used bysmall and medium businesses. In our view, the rise of cloud technol-ogy is democratizing IT as it enables small and medium businessesto utilize enterprise-class applications. This is best exemplified by thegrowing success of SaaS.

Payments. The payments industry is undergoing significant change,with solutions from smartphone vendors, retailers, and financial tech-nology start-ups all competing to establish their platform as the indus-try standard. Additionally, some of the technology from so-called"digital currencies" such as block chain, (essentially a secured ledgerof historical transactions) is increasingly part of the discussion withinthe mainstream payments industry.

Please refer to the Glossary for a discussion of key technical terms.



Glossary

ASP – Average Selling Price.

Hybrid Cloud – A model of computing and a service which utilizes a mix of on-premise Private Cloud and off-premise PublicCloud, with communication and management across the two clouds. Hybrid Clouds are typically utilized for “bursty”workloads (i.e., high volume, but irregular) tasks, such as Test & Development. Similar to both Public and Private Cloud,Hybrid Cloud attempts to improve the economics of IT through scale and high utilization.

Horizontal Software – An application or service that can support a broad range of uses. Examples include spreadsheetsor databases. Horizontal Software often is used underneath application software, for example an inventory managementapplication system may rely on a database for data storage and management.

Infrastructure-as-a-Service (IaaS) – A model of cloud computing in which computing, storage, and networking resourcesare owned and hosted by a service provider and made available to subscribers over the internet in a utility model (i.e.,pay-as-you-go). The customer does not own or manage the underlying infrastructure but typically does have the abilityto choose operating systems, storage, and applications. Customers typically self-provision their choice of infrastructurethrough a web-based console. IaaS is typically thought of the lowest layer of cloud service.

Infrastructure Software – A type of enterprise software that performs fundamental IT tasks, such as storage, informationmanagement, IT operations management, and middleware.

Networking Functions Virtualization (NFV) - Similar to SDN, NFV aims to virtualize networks by providing services throughsoftware rather than proprietary hardware. NFV can address networking services such load balancing and applicationdelivery and control, both of which have typically been delivered through proprietary solutions.

Platform-as-Service (PaaS) – A model of cloud computing that allows subscribers to develop and deploy Web applicationswithout having to own or maintain any of the underlying infrastructure and software tools typically required. The subscribertypically does not manage or control the underlying infrastructure (and is often indifferent by design), but does have theability to select databases, programming languages, and operating systems. PaaS is typically thought of as the cloud layerthat resides between IaaS and SaaS.

Private Cloud – A model of computing in which users (typically a large enterprise) utilize pooled resources. Similar toPublic Cloud, Private Cloud attempts to improve the economics of IT through scale and extremely high utilization. The keydifference is that Private Cloud infrastructure is owned and maintained by enterprise and resides within the enterprise’sfirewall (i.e., it is not delivered through the internet).

Public Cloud – A model of computing and a service in which a provider makes IT resources including infrastructure andapplications available to subscribers over the internet. Public clouds are multi-tennant, meaning that many customers utilizethe same underlying resources rather than their own dedicated resources. Public Cloud is typically delivered and chargedas a utility (i.e., pay-as-you-go), and attempts to improve the economics of IT through scale and extremely high utilization.

Software-as-a-Service (SaaS) - A relatively new model of licensing and delivering software in which the customer does notown or maintain the software, but instead pays a subscription fee. SaaS is disruptive in that it allows small and mediumbusinesses to affordably consumer enterprise-grade software.

Software Defined Networking (SDN) - An emerging networking technology that uses open (i.e., non-proprietary) protocolsrather than vendor-specific proprietary protocols. The goal of SDN is to provide better network agility, increase networkprogrammability, and reduce capital and operating costs.



Accenture Plc: Most PreferredAccenture is a leading professional and IT services company, providing management consulting, technology, andoutsourcing services to clients across a broad range of industries. The company has a broadly diversified client base acrossall major economic sectors. Consulting services account for approximately 54% of revenue and outsourcing accountsfor approximately 46%. Accenture operates in more than 200 cities across 56 countries worldwide. The company isheadquartered in Dublin, Ireland and has approximately 425,000 employees.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.54 109,790 22,689.9 110,939

Consensus Forecasts (FY end) Aug 2017 Aug 2018E Aug 2019E

Sales ($M) 34,850 39,426 42,127

Net Income ($M) 3,946.5 4,362.5 4,714.8

First Call EPS ($) 5.91 6.72 7.27

P/E (x) 29.2 25.7 23.7

EV/EBITDA (x) 13.0 15.2 14.5

Consensus Rating Distribution Buy Hold Sell

15 8 3

Source: Factset, UBS as of 21 September 2018

What drives our opinionWe view Accenture as a leader in the IT services market. Relative tolarge consulting and outsourcing peers, ACN has posted better rev-enue growth and margins. We believe this is due to its increasing ver-tical focus, its technology focus, and a proven willingness and abili-ty to evolve its solutions and offerings as customers' needs change.However, our positive fundamental view is balanced by a relativelyhigh valuation vs. Enterprise-IT focused peers. We note ACN's P/E vs.consensus next 12-month estimates has expanded from 19x to 23xover the past two years. Risks to our view include exposure to legacymaintenance revenue, management execution, and overall demandfor IT services.

Against a backdrop of improving IT demand, we believe IT consult-ing and outsourcing will see accelerating demand as companies seekadvice and assistance in moving their IT architectures to the cloud.Security, mobility, and analytics will be other key areas of demand,and we believe Accenture is well positioned across these domains.

The IT services market is highly fragmented, allowing ACN to bolsterits organic growth efforts through targeted M&A activity. We expectfurther acquisitions, particularly in industries at cyclical lows (eg, ener-gy and power) as well as in growth areas including digital.

ACN's stock price has been fueled by revenue and earnings that havehad consistently strong positive estimate revision cycles, leading toan expansion of its valuation. Although we see limited opportunityfor further multiple expansion, we expect the shares to be driven byfurther positive revenue and EPS revisions going forward.

Although ACN's valuation may give investors pause as it is fairly richrelative to enterprise IT peers, we believe the stock's valuation is war-ranted given the company's positioning, growth, and history of exe-cution. We believe the company is relatively less exposed than peersto potential immigration reform.



Adobe Systems: Most PreferredAdobe Systems is a leading provider of software and cloud-based solutions to creative professionals. Through its CreativeCloud offering, Adobe users can create and manage digital content for delivery and consumption across multipleplatforms. Adobe's Digital Marketing Solutions offerings provide the tools necessary to create, manage, and optimizedigital marketing and advertising. Adobe was founded in 1982 and is headquartered in San Jose, CA. The company hasapproximately 18,000 employees worldwide.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

0.00 128,540 14,839.7 129,702

Consensus Forecasts (FY end) Nov 2017 Nov 2018E Nov 2019E

Sales ($M) 7,302 8,990 10,728

Net Income ($M) 2,161.0 3,387.9 3,843.9

First Call EPS ($) 4.31 6.82 7.84

P/E (x) 61.3 38.7 33.7

EV/EBITDA (x) 27.8 32.8 26.1


17 9 1

Source: Factset, UBS, as of 21 September 2018

What drives our opinionAdobe Systems was early in transitioning its business to a subscriptionmodel. By virtue of its control of its customer base, many of whomhave standardized much of their work flow on Adobe products, thecompany was able to manage this transition fairly smoothly. The ben-efits have been two-fold: 1) Adobe has annuitized much of its busi-ness, with more than 80% of revenues now recurring; and 2) thecompany has also been able to drive price increases through bundlingand adding additional features that customers value. Risks includemanagement execution on the continued business model transitionand overall demand.

We expect continued strong growth for Adobe. Within CreativeCloud, which accounts for more than half of revenue, the companystill has a significant portion of the installed base yet to be convertedto the subscription model. This should drive healthy growth in annu-alized recurring revenue (ARR), a metric similar in concept to billings(and typically used to measure the true health of software companies).We expect ARR to be investors' primary focus moving forward.

Adobe benefits from this transition to a subscription model as it cap-tures the value of upgrades and new features pushed into the base,effectively "forcing" an upgrade.

Digital marketing campaign management may not be a new develop-ment, but we believe the saturation of smartphones and the increasedusage of technology to analyze large untapped pools of data pro-vide a strong tailwind for further growth. Adobe is well positionedhere through its digital marketing segment (around 25% of revenue),which allows end-to-end digital campaign management.

We expect the company to be a consolidator and that this will bewell received as users are looking for a more comprehensive solutiondelivered in a uniform platform.



Cisco Systems Inc.: Most PreferredCisco is the leader in data networking equipment sold to enterprises, telecom and cable service providers, and Web 2.0companies. Switching remains the majority contributor of Cisco revenue at around 30% of the total, followed by routing(~15%), collaboration products and services (~10%), data center (~8%), wireless (~5%), cable equipment (~5%), security(~5%), and services (~24%). Cisco was founded in 1984 and is headquartered in San Jose, CA. The company has morethan 70,000 employees worldwide.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

2.62 209,795 108,784.0 216,132

Consensus Forecasts (FY end) Jul 2018 Jul 2019E Jul 2020E

Sales ($M) 49,330 51,550 53,073

Net Income ($M) 12,703.0 13,535.0 14,094.0

First Call EPS ($) 2.60 3.00 3.26

P/E (x) 18.6 16.1 14.9

EV/EBITDA (x) 10.5 11.2 10.5


19 8 0


What drives our opinionCisco faces a landscape of shifting technology and changing customerdemands, but we are optimistic that the company will successfullynegotiate these challenges. Key risks to our view include econom-ic growth, Cisco's ability to execute on new product initiatives, andcompetition.

Cisco was slow initially to react to the challenge of software-definednetworking (SDN, a technology that sought to disrupt networking).However, we believe the combination of an SDN market that wasslower to develop than expected, and Cisco’s large incumbency, hasallowed it to reposition its strategy and product portfolio.

We believe SDN also presents Cisco with an opportunity to achieve itsstated goal of increased software and recurring revenue, a goal thatwe believe could lead the stock to re-rate higher over time.

Continued customer uncertainty around technology issues such asSDN will likely cap enterprise switching. However, healthy growth indata-center products and security will likely be supplemented by tar-geted acquisitions, resulting in consistent top-line growth over thelonger term.

Near-term growth could be challenged by a weak macro environmentin emerging markets, currency volatility, and tepid telecom serviceprovider spending; we expect these headwinds to reverse over thecoming quarters. Beyond this, we expect a fairly healthy demand envi-ronment, with new product cycles and continued cost discipline thatshould yield solid earnings and cash flow growth.

We expect the company to continue to focus on increasing its mixof security and software, which over time will drive a greater mix ofrecurring high-margin revenue, lessening the company's reliance onhardware. Over time, we think Cisco stock will be rewarded for thisimprovement with a higher P/E multiple.



HP Inc.: Most PreferredHewlett-Packard is a leading provider of PCs and printers to consumers and corporations worldwide. It is the "remainco" of Hewlett-Packard, which was founded in 1939. HP Inc. is headquartered in Palo Alto, CA and has approximately49,000 employees worldwide.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

2.18 40,974 32,913.0 39,972

Consensus Forecasts (FY end) Oct 2017 Oct 2018E Oct 2019E

Sales ($M) 52,056 57,813 58,833

Net Income ($M) 2,815.0 3,284.4 3,391.1

First Call EPS ($) 1.65 2.02 2.16

P/E (x) 15.7 12.8 12.0

EV/EBITDA (x) 8.4 8.6 7.9


10 10 0

Source: FactSet, UBS as of 21 September 2018

What drives our opinionAfter five years of declines, PC demand is stabilizing and HP has donean admirable job in gaining share. More importantly, we believe HP'sall-important printer supplies business has stabilized and is poised forgrowth across a combination of traditional and new printing markets.While printing only accounts for 35% of revenue, it drives more than75% of operating income due to the extremely high margins in sup-plies. We view HP's valuation of approximately 11x consensus 12-month forward EPS estimates as attractive. Risks to our view includedemand for PCs, printers, and printing supplies; and HP's ability tosuccessfully gain share in the commercial, office, and 3D printing mar-kets.

Although the longer-term opportunity in the PC market remainssomewhat muted in terms of revenue and operating profit growth,demand has nonetheless stabilized and we expect continued sharegains for HP. A better PC environment is a modest positive, but theimpact on free cash flow is greater than operating margins due toPC's low operating margin.

Historically, printer unit sales are a leading indicator for ink and tonersales, which drive profits for printer vendors. The consumer and officeprinting industry appears to be in modest secular decline given thepersistent decline in printer units across both ink-jet and laser print-ers. However, printer hardware sales have recovered a bit and HP hasaddressed channel inventory issues related to its supply business, set-ting the stage for better growth going forward.

Longer-term, we believe HP's success will be driven by its efforts tobreak into the commercial copier and the A3 office printing markets,which will more than offset secular headwinds. We expect this effortwill bear fruit over time against the back drop of a stable PC and tra-ditional printing market. Additionally, we believe HP is well-positionedin the still-nascent 3D printing market.



Intel Corp.: Most PreferredIntel is the world’s largest semiconductor company, with a near-monopoly share in processors for PCs and servers. Thecompany is also a provider of NAND memory and semiconductor solutions for wireless and data center applications.Founded in 1968, Intel is headquartered in Santa Clara, CA and has approximately 106,000 employees worldwide.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

2.54 235,645 123,249.0 212,798

Consensus Forecasts (FY end) Dec 2017 Dec 2018E Dec 2019E

Sales ($M) 62,761 69,542 71,501

Net Income ($M) 16,753.0 19,742.8 19,746.5

First Call EPS ($) 3.46 4.15 4.23

P/E (x) 13.6 11.3 11.1

EV/EBITDA (x) 9.4 8.0 7.5


17 16 3

Source: FactSet, UBS, as of 21 September 2018

What drives our opinionWe expect the relative stability in Intel's PC business to be comple-mented by growth in the Data Center Group (DCG), which providesprocessors used in traditional servers and cloud-based computing.The company should also benefit from narrowing losses in its mobilebusiness. Key risks to our view include continued sluggishness in PCdemand, the health of data center spending, and Intel's ability toreduce losses in its mobile business.

Intel shares have been pressured by concerns regarding share loss tocompetitor AMD, related concerns regarding Intel's manufacturingleadership, as well as the pending CEO change CEO. In our view, manyof these concerns are overstated and we believe this has created anattractive entry point for longer-term owners.

Although Intel will likely lose some small amount of share to AMD inthe near-term, we believe that any share loss will be predominantly inthe low-end of the server market. There may also be some near-termshare loss in PC processors, but we believe this will mostly be due toIntel's constrained supply rather than AMD's product portfolio.

Intel is currently supply constrained as it transitions its manufactur-ing to the latest processing node. The company has admittedly hadmore than they typical struggles in this transition, but we believeIntel is making progress. Furthermore, we believe high-end servermanufacturers and the very large cloud service providers (e.g., Ama-zon, Google, and Microsoft) no longer chose chips on a "speeds andfeeds" basis but rather with a bigger picture view that incorporatesan overall systems level view as well as roadmap and availability.

We see current valuation as extremely attractive.



Juniper Networks Inc.: Most PreferredJuniper is a leading provider of data networking and security equipment used by telecom service providers, cable operators,Web 2.0 companies, and enterprises. We estimate that sales of equipment to service providers (telecom, cable, Web 2.0,and cloud) account for approximately 70% of revenue, and enterprise sales around 30%. Juniper Networks was foundedin 1996 and is headquartered in Sunnyvale, CA. The company has approximately 8,800 employees.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

2.19 9,244 9,833.8 10,068


Sales ($M) 5,027 4,728 4,858

Net Income ($M) 809.0 629.3 704.7

First Call EPS ($) 2.11 1.77 2.04

P/E (x) 14.1 16.8 14.5

EV/EBITDA (x) 6.6 9.3 8.4


5 16 5


What drives our opinionAlthough Juniper has faced significant challenges due to slack spend-ing by its telecom service provider customers (around 40% of rev-enue), we believe this is cyclical in nature and expect spending torecover in 2018, a bit later than our prior expectations. The compa-ny is the No. 2 provider in carrier core routing behind Cisco, and thetwo companies are essentially a duopoly in the worldwide carrier corerouter market ex-China. The company also provides smaller routersto carriers (“edge routers”) and has steadily gained share in this mar-ket. Key risks to our view include carrier capital expenditures, productcycles, M&A, and company execution.

JNPR has been challenged by tepid global carrier capex spending,which has offset the benefits of new products across much of its port-folio. Additionally, its security business has declined for the past fouryears.

We had previously expected a modest improvement in telecom spend-ing in 2H17; this proved too optimistic, but we continue to believecarrier spending is near a cyclical low and poised to improve laterthis year. Web 2.0 companies should continue to invest strongly. Thishad been a healthy revenue driver for Juniper until 3Q17, when itannounced disappointing results due to lower demand at a largecloud customer. We believe this will prove to be a temporary lull andbelieve spending by this customer will reaccelerate.

JNPR should also benefit from nearing the end of a product familytransition, which had a dampening effect on revenue and margins,but should no longer be a headwind in 2019. Additionally, we expectthe company's costly efforts to break into the China market will bearfruit in 2019.

The company has pared its operating costs and diversified its board ofdirectors in response to activist investors. In this vein, we view valua-tion as attractive relative to Juniper’s own history, peers, and its owngrowth prospects.



Microsoft Corp.: Most PreferredMicrosoft is the well-known provider of the Windows operating system and Office productivity suite, and is a leadingprovider of enterprise software. The company has continued to expand into the hardware market through its developmentof the Xbox franchise and, its Surface offerings. Along with stabilization in its Windows client franchise, Microsoft is doinga better job than most, in our view, in transitioning its commercial products to the cloud. It is now the No. 2 providerof cloud services behind Amazon.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.50 817,363 258,848.0 856,540

Consensus Forecasts (FY end) Jun 2018 Jun 2019E Jun 2020E

Sales ($M) 110,360 122,824 135,824

Net Income ($M) 30,267.0 33,040.5 37,791.8

First Call EPS ($) 3.88 4.27 4.92

P/E (x) 29.6 26.9 23.3

EV/EBITDA (x) 15.4 12.8 11.0


27 4 1


What drives our opinionWe believe Microsoft is managing the transition of its business to thecloud better than most peers, and the company is largely past rev-enue and margin headwinds typically seen in these transitions. TheWindows franchise appears to be at least stable, while the companycontinues to gain share in mobile applications. Valuation is fair relativeto growth prospects, peers, and history, but we believe MSFT sharesoffer an attractive combination of growth and defensive characteris-tics. Key risks to our view include PC demand, the company's abilityto execute on its cloud strategy, and potential for large M&A.

In the aftermath of a poor Windows 8 product cycle, Microsoft seemsto have finally found its footing as evidenced by its string of recentlyreported solid results and a return to positive estimate revision trends.

The transition to the cloud for its Office and Server & Tools franchis-es should have significant benefits for Microsoft over time by drivinghigher lifetime value (LTV), a measure of the profitability of a sub-scription customer that takes into account customer acquisition cost,churn, and the cost of service. Microsoft has stated that it believes itcan drive a 1.2-1.8x increase in LTV as customers transition to a sub-scription model.

While it is too early to tell for certain, we tend to agree with Microsoft;we believe many customers run MSFT products across multiple prod-uct cycles and that the subscription model likely carries lower oper-ating expenses since much of the customer base likely auto-renews,lowering churn and commission costs.

MSFT share valuation reflects its better-than-typical execution in itscloud transition and cost discipline. While shares are not "cheap" webelieve MSFT offers an attractive mix of growth through its cloud busi-ness and defensive characteristics due to its recurring revenue model,high cash flow, and likely capital return.



Oracle Corp.: Most PreferredOracle is a leading provider of IT solutions to enterprises. The company is the largest provider of database software andrelated tools, has significant market share in middleware and applications, and has a growing presence in cloud-basedservices. Oracle also offers integrated hardware solutions. Founded in 1977 and headquartered in Redwood City, CA,Oracle employs approximately 132,000 employees worldwide.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.54 196,203 137,264.0 196,789

Consensus Forecasts (FY end) May 2018 May 2019E May 2020E

Sales ($M) 39,878 40,085 41,322

Net Income ($M) 13,244.0 13,348.9 13,968.0

First Call EPS ($) 3.12 3.38 3.65

P/E (x) 16.4 15.2 14.0

EV/EBITDA (x) 9.6 10.3 9.4


16 16 1


What drives our opinionOracle has been challenged on multiple fronts: its own transition tothe cloud is more difficult than many have expected; it faces sig-nificant threats from emerging technologies; and its core productsappear to be less suited to modern needs. However, it does appearthat estimates have troughed and valuation is now extremely cheaprelative to peers and fundamentals. We expect stability in its core data-base business and acceleration later this year in its cloud offerings. Keyrisks to our view include database demand, competition from newertechnologies, and the company's ability to execute.

Oracle's execution has been uneven over the past few years. The high-end database and tools market is largely mature, limiting opportunityfor growth. Additionally, newer database (DB) technologies focusedon unstructured data (ie, data that is not in a traditional table form)seem to be winning new, incremental workloads and applications atthe expense of Oracle. However, despite the looming threat of cheap-er DB solutions from Amazon’s AWS, we believe Oracle's installedbase and the associated very high margin/cash flow from mainte-nance and support is largely stable. This underpins our constructivestance on the stock.

Oracle does have its own well-established software-as-a-service andplatform-as-a-service offerings. Execution has been uneven, andalthough it is unclear to us if Oracle will capture net new business, itcan benefit by simply shifting customers from traditional software toa cloud-based subscription model. We expect SaaS growth to reac-celerate within a few quarters.

We believe valuation is extremely attractive at 15x next 12-month EPSestimates and a forward free cash flow yield of nearly 8%.



Red Hat: Most PreferredRed Hat is the leading provider of support for the open source Linux operating system. It also provides support for opensource middleware, storage, and cloud software products. The company has benefited from a secular migration awayfrom proprietary server operating systems and software toward more open source solutions and overall steady growthin the server market. The company was founded in 1993 and is headquartered in Raleigh, NC. Red Hat has more than7,300 employees globally.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

0.00 25,510 5,466.5 25,393

Consensus Forecasts (FY end) Feb 2018 Feb 2019E Feb 2020E

Sales ($M) 2,920 3,398 3,916

Net Income ($M) 540.0 639.9 733.2

First Call EPS ($) 2.98 3.47 3.96

P/E (x) 45.3 38.9 34.1

EV/EBITDA (x) 32.9 30.1 28.5


15 12 1


What drives our opinionWe expect continued share gains by Linux in general, and furthershare gains by Red Hat versus the overall Linux market. We expectthe overall server market to grow in the mid-single-digit range, withLinux growth in the high-single-digit range. This should support low-double-digit revenue growth for Red Hat Enterprise Linux. Key risksto our view include the company's ability to gain share, continuedadoption of open source middleware, and overall competition.

The open source market is poised to make significant inroads intoproprietary IT stacks across middleware, storage, virtualization, andmanagement. These markets combine for an addressable market ofover USD 40bn, or more than twice that of the Linux server OS market,according to the company. Red Hat has de minimis revenue share,but we believe it has the brand, trust, recognition, and distributionto make major inroads.

Recently reported results were mixed. Revenue was slightly belowconsensus expectations, but more importantly, billings (which we viewas a more important metric than revenue) grew 16% y/y. Billingsgrowth has moderated a bit over the past two quarters, but we believethis is largely a function of Red Hat's renewal base.

As Red Hat expands its offerings beyond its core Linux offering, webelieve the company is becoming a more strategic vendor and signinglarger deals over time. While this is a clear positive longer-term, in thenear to intermediate term this creates a few headwinds: larger, com-plicated deals tend to increase seasonality and may skew comparisonsto prior years' growth for a few quarters. Choppier results may drivegreater near-term volatility, but also create attractive entry points forlonger-term investors.



Salesforce.com: Most PreferredSalesforce.com is one of the largest and most successful software-as-a-service (SaaS) companies and a leader in thecustomer relationship management (CRM) market. The company's cloud-based offering allows organizations to bettertrack how they sell, service, and market to customers. The company has expanded its portfolio from its core CRM offeringto include cloud-based offerings for customer service, marketing, analytics, as well as an application development platform.Founded in 1999 by Marc Benioff and Parker Harris, Salesforce.com is headquartered in San Francisco, CA and has morethan 16,000 employees worldwide.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

0.00 119,316 21,009.8 115,699

Consensus Forecasts (FY end) Jan 2018 Jan 2019E Jan 2020E

Sales ($M) 10,480 13,169 15,858

Net Income ($M) 991.3 1,942.1 2,193.0

First Call EPS ($) 1.35 2.50 2.73

P/E (x) NM 63.5 58.2

EV/EBITDA (x) 40.5 37.5 30.1


35 4 0


What drives our opinionWe expect Salesforce.com to continue to benefit from new customeradditions, additional sales into existing customers of add-on products,and modest margin expansion as revenues grow faster than expenses.Salesforce.com is the leader in the highly fragmented customer rela-tionship management (CRM) market, with approximately 20% shareaccording to industry analyst Gartner. We expect further share gainsas the company benefits from continued investments in its sales andR&D efforts. Additionally, the company has a proven track record ofupselling additional products into the existing customer base. Risks toour view include overall IT spending, competition, and managementexecution.

We expect Salesforce.com to continue to post best-in-class growthrates driven by continued share gains in its core CRM market, supple-mented by even stronger growth in adjacent opportunities.

Salesforce.com continues to invest aggressively for growth. This hastaken the form of additional data centers to host its services, andinvestment in R&D and sales to expand its offerings and capture newsubscribers. In our view, this is a sensible strategy given the large andstill-growing opportunities. Although the company has the highestmargin among SaaS peers, we believe profitability can improve in thefuture as these investments level off.

In our view, Salesforce.com offers the strongest combination of posi-tioning in the cloud, execution, and strategic vision. Management hascommitted to expanding margins and cash flow even as it maintainsbest-in-class growth rates at scale.

We note that CRM shares carry one of the highest valuations in itspeer group and that shares have historically been volatile; therefore,CRM shares are most appropriate for risk-tolerant investors as part ofan overall portfolio strategy, in our view.



Splunk: Most PreferredSplunk is a leading provider of software that enables customers to collect and analyze Big Data. Simply put, we view BigData as data that comes in high-volume, at high speed, and has a varied format and is not easily or economically managedby traditional database systems. Splunk specializes in managing and analyzing machine generated data, such as log andevent files, from other systems such as security. Splunk was incorporated in 2003 and is headquartered in San Francisco,CA. The company had over 2,100 employees as of January 2016.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

0.00 14,830 2,044.5 16,581


Sales ($M) 1,271 1,687 2,095

Net Income ($M) 89.2 166.4 248.3

First Call EPS ($) 0.62 1.10 1.56

P/E (x) NM NM 74.4

EV/EBITDA (x) 88.2 64.8 45.8


32 6 0


What drives our opinionWe see Splunk as a leading horizontal software platform in the BigData market. Splunk should continue to see strong revenue andbillings growth driven by continued adoption by new users as well asstrong renewal rates and upsell activity into its installed base. Marginsand cash flow should improve over time, but the company plans tocontinue to invest aggressively in the intermediate-term to capitalizeon its market opportunity, which is the correct strategy in our view.However, these positives are balanced by fairly rich valuation. Key risksto our view include SPLK's high valuation and the need to sustain ahigh growth rate.

IT systems and hardware assets generate tremendous amounts ofinformation that is rightly classified as Big Data. This can be in theform of log files, alerts, and other operational information that helpsmanage IT infrastructure.

Splunk specializes in managing and analyzing this type of machinegenerated data, such as log and event files. Its products are differen-tiated by their ability to rapidly ingest, index, manage, and analyzeunstructured data. Additionally, developers and other IT companiescan write applications to run on the Splunk platform, positioning thecompany as a critical infrastructure provider across multiple domains.

We view Splunk as a leader in the Big Data space, with applicationsin security, IT operations and management, and business intelligence.We expect strong revenue growth driven by continued adoption bycustomers and increased consumption by its existing base. Addition-ally, we expect Splunk to continue to develop an ecosystem of part-ners that should further drive adoption.

SPLK shares carry a fairly high valuation and profitability is capped byhigh expenses as the company invests for growth. These factors canlead to high stock volatility. For this reason, SPLK should be consideredpart of an overall basket of IT sector holdings.



Akamai Technologies: BellwetherAkamai is a leading supplier of content delivery services through its owned-network of over 200,000 servers on more than1,400 networks in 120 countries. The company's content delivery network (CDN) helps customers improve the deliveryspeed of digital content over the public internet. Akamai also offers security services designed to protect customers fromcyber attacks. Akamai was founded in 1998 and had approximately 6,490 employees as of December 2016. The companyis headquartered in Cambridge, MA.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

0.00 12,379 4,602.8 12,499


Sales ($M) 2,503 2,699 2,925

Net Income ($M) 218.3 275.0 401.3

EPS (adj.) 2.62 3.35 3.80

P/E (x) 28.3 22.2 19.5

EV/EBITDA (x) 11.8 11.6 10.6


12 10 1


What drives our opinionWe view Akamai's current stock price and valuation as fair given themix of risks and opportunities facing the company. Akamai is poten-tially facing significant competition from leading Web 2.0 and cloudcompanies, who were formerly "anchor tenants" for Akamai. This hasresulted in a material slowdown in growth for the company's MediaDelivery Solutions segment (29% of FY17 revenue). At the same time,the rise of 4K video may present a longer-term opportunity and thecompany has an attractive and fast-growing security business. Keyrisks to our view include the overall demand for content delivery net-work (CDN) and security solutions, the competitive environment, andnetwork costs.

Although AKAM faces challenges in its core CDN business, it hasbuilt out a substantial security business, offering customers protectionfrom distributed denial of service (DDOS) and other cyber attacks. Webelieve Akamai should see continued strong growth given the rise of"hacktivists," whose preferred attack method is DDOS.

We note that AKAM pays significant costs to telco network providersfor bandwidth and colocation (12% of FY17 revenues). Manage-ment did an admirable job in keeping these costs flat 7% versus rev-enue growth. However, given ongoing consolidation in the wholesalebandwidth market, we expect bandwidth costs will continue to rise,which may pressure margins if tepid revenue growth trends persist.

Activist investor Elliot Management disclosed a 6.5% stake in AKAMin December 2017 and proposed various measures to maximize share-holder value. Management is moving forward with a shareholder val-ue initiative largely in line with Elliot's recommendations and focusedon identifying efficiencies and margins while maintaining growth. Thecompany also announced it has increased it share repurchase autho-rization to USD 750mn. While these are clearly steps in the right direc-tion, we believe the benefits are largely reflected in current valuation.



Apple Inc.: BellwetherApple, the world’s largest company by market cap, is the well-known maker of the iPhone, iPad, and Mac PCs, and otherproducts and services in the iOS and Mac OS ecosystem. The company dominates the smartphone industry, garneringroughly 85% of industry profits versus approximately 15% of units. The iconic iPhone accounts for 66% of companyrevenue and a likely higher percentage of operating profit. Founded in 1977, Apple is headquartered in Cupertino, CAand has approximately 123,000 worldwide.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.25 1,119,454 375,319.0 1,054,712

Consensus Forecasts (FY end) Sep 2017 Sep 2018E Sep 2019E

Sales ($M) 229,234 264,316 279,107

Net Income ($M) 48,351.0 58,713.2 62,757.6

First Call EPS ($) 9.21 11.74 13.59

P/E (x) 24.0 18.8 16.2

EV/EBITDA (x) 9.2 11.4 10.8


22 14 1


What drives our opinionWhile an increasing mix of service revenue will help, we continueto believe Apple will have difficulty growing overall revenue overthe intermediate to longer term due to headwinds from a saturat-ed smartphone market and a lengthening replacement cycle. In theabsence of growth, we believe it is difficult to argue for higher valua-tion. Risks to our view include competition in the smartphone marketand the company's ability to continue to innovate.

We continue to view Apple as a short-cycle consumer product com-pany that enjoys dominant but perhaps unsustainable profits dueto average selling prices that have been remarkably steady despiteincreased adoption as a mass-market luxury brand.

Although overall iPhone demand has been muted relative to expec-tations (as reflected in reductions to consensus estimates for iPhoneunits), there is continued optimism around the upcoming iPhones andservices. However, we are somewhat cautious on both of these fronts.

Given the saturation in developed markets, the best growth opportu-nities for smartphones, in our view, are in emerging markets. Howev-er, we believe Apple faces significant competition from local vendorswho have gained significant share. Beyond China, we believe Apple'siPhone growth may be challenged by the inherently lower averageselling prices in these markets. For example, we don't believe Applewill see material success in India, where average monthly cell phonebills are less than USD 3 per month. We believe there is likely down-side risk to consensus iPhone ASP estimates and therefore downsiderisks to forecasted revenue and earnings.

While services are growing nicely, we believe this growth could bemore than offset by any slowdown in iPhone sales.

With the details of its capital return program now disclosed and large-ly incorporated into consensus estimates and views, we believe shareslack significant catalysts.



Applied Materials Inc.: BellwetherApplied Materials is the world’s largest provider of semiconductor capital equipment and services (64% of trailing 12-month revenue). The company is also a provider of systems and services used in the manufacture of flat panel displays andin the solar energy markets. The company’s semiconductor business is generally focused on leading-edge technologies.Additionally, its products and services primarily focus on wafer fab equipment (WFE), which is used in the “front end”of semiconductor manufacturing as opposed to the “back end” package and test applications. Applied Materials wasfounded in 1967 and is headquartered in Santa Clara, CA. The company has approximately 17,600 employees globally.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.54 40,559 19,424.0 38,376


Sales ($M) 14,537 17,217 17,193

Net Income ($M) 3,525.0 4,545.8 4,237.8

First Call EPS ($) 3.25 4.47 4.38

P/E (x) 12.0 8.7 8.9

EV/EBITDA (x) 13.0 8.6 8.7


20 6 0


What drives our opinionAfter the recent strong stock price performance relative to the S&P500 and the S&P 500 Semiconductor & Semiconductor Equipmentindices, we believe AMAT shares will be largely range-bound. Theimprovement in semiconductor capital investment is widely under-stood at this point and is largely reflected in consensus estimates.We believe valuation appears fair and is currently at or near historicalaverages. Key risks to our view include the health of key end-markets(smartphones, PCs, memory) and the level of semiconductor industrycapital investment.

Despite continued tepid demand in key end-markets such assmartphones and PCs, semiconductor companies have to investin new manufacturing technologies to maintain their competitive-ness. Although we believe there is some risk of order push-outs ordelays, semiconductor capital investment plans have been surprising-ly resilient. Additionally, new opportunities in the OLED (organic lightemitting diode) display market may provide incremental growth.

While this is seemingly a positive backdrop for AMAT shares, webelieve these factors are largely reflected in consensus estimates andvaluation, and we expect the stock to be largely range-bound.



Broadcom Corp.: BellwetherBroadcom is a leading provider of advanced semiconductor products serving the wireless communications, enterprisestorage, wired infrastructure, and industrial and other markets. The company is the result of the merger between AvagoTechnologies and Broadcom. Originally a unit within Hewlett-Packard and its subsequent spin-out Agere, Avago was spunout of Agere in 2005 and went public in 2009. The company has seen significant growth through its organic efforts andthrough M&A.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

2.59 120,097 54,418.0 99,967


Sales ($M) 17,665 20,819 21,460

Net Income ($M) 7,255.0 9,268.3 9,346.3

First Call EPS ($) 16.02 20.54 21.52

P/E (x) 15.6 12.1 11.6

EV/EBITDA (x) 13.8 9.2 11.1


24 7 0


What drives our opinionBroadcom management has done an admirable job of acquiring andintegrating assets to drive margin improvement, but its underlyingorganic growth prospects are unclear. However, we struggle to see theindustrial logic of the recent announcement of the company's planto acquire software vendor CA Technologies. At the same time, webelieve the company will face headwinds from its reliance on Apple inits wireless business. Key risks to our view include demand, manage-ment execution, M&A, and the potential for either a share buybackor a significant dividend increase.

We see risks related to AVGO's continued high exposure to smart-phones. Wireless communications accounted for 38% of total rev-enue last quarter and the company's filings state that Apple accountsfor over 30% of total company revenue, implying that Apple accountsfor approximately 80% of the company's wireless revenue.

While Broadcom has benefited from content gains at Apple, webelieve further share gains will be more difficult and iPhone demandwill likely be underwhelming. Away from Apple, smartphone marketgrowth has slowed dramatically, with incremental growth increasinglydriven by lower-end devices sold into emerging markets. We believesemiconductor content is significantly lower in these devices, present-ing another potential headwind to Avago's revenue growth.

Broadcom should see healthy growth in in wired communicationsbusiness as adoption of its Jericho and Tomahawk chipsets for switch-ing and routing, respectively, continue to ramp. Products into theindustrial market should grow nicely, but we are concerned thatits storage business will see declines on an organic basis (ie, afteraccounting for the impact of acquisitions).

Valuation is undemanding at current levels, but a discount is likelywarranted given serial acquisitions.



Cognizant Technology: BellwetherCognizant Technology is a leading provider of IT consulting and IT services. The company offers consulting and technologyservices across the business, operations, and IT domains. This includes applications development and systems integration,information management, and software solutions. The company also offers outsourcing services including applicationmaintenance, infrastructure services, and business process outsourcing. Cognizant Technology was spun out of Dun &Bradstreet in 1996 and went public in 1998. The company has over 221,000 employees globally and is headquarteredin Teaneck, NJ.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

0.99 41,097 15,221.0 44,156


Sales ($M) 14,810 16,172 17,561

Net Income ($M) 1,504.0 2,134.6 2,595.8

First Call EPS ($) 3.77 4.52 5.07

P/E (x) 20.5 17.1 15.2

EV/EBITDA (x) 12.3 11.9 9.9


20 9 0


What drives our opinionAlthough we believe IT services companies such as Cognizant are wellpositioned to capitalize on the ongoing demand for outsourced ITand consulting services, we nonetheless believe the company will beuniquely challenged by its outsize exposure to the financial servicesvertical (around 40% of revenue) given continued challenges in thatindustry that have only been exacerbated by the recent Brexit vote.Key risks to our view include IT spending health, competition, andforeign exchange volatility.

Over the past few years, CTSH shares have been pressured by con-cerns regarding IT budgets in the financial services sector, challengesin some of its core business, and uncertainty related to some largecustomers.

The result was three consecutive reductions in management's outlookprior to the company's most recent earnings call. While recent resultsand guidance may point to stabilizing trends, we do not have strongconviction that revenue growth will meaningfully accelerate.

Our longer-term concerns center around the impact of IT architecturesmoving to the cloud and its exposure to legacy application and infra-structure maintenance. More broadly, we believe that Cognizant, andmany other IT services providers, face challenges as customer demandevolves from scale solutions (i.e., traditional outsourcing model) tomore skill-based solutions (i.e., outsourcing based on targeted skillsand capabilities).

Cognizant's P/E multiple has historically been at a premium to IT ser-vices peers and also fairly well correlated to EPS growth expectations.In light of reduced growth expectations and limited ability to growEPS above peers, we see little room for P/E multiple expansion andview the shares as fairly valued at current levels.



Corning: BellwetherCorning is a diversified materials science company, with exposure to the LCD TV, smartphone, tablet, opticalcommunications, automotive, and healthcare markets. The company also owns 50% of Dow Corning Corp, a siliconeproduct provider, which also owns the majority of Hemlock Semiconductor, a market leader in polysilicon used in thesemiconductor and solar energy markets. Founded in 1851, Corning has approximately 40,700 employees worldwide andis headquartered in Corning, NY.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.97 38,943 27,494.0 28,553


Sales ($M) 10,514 11,271 12,069

Net Income ($M) 1,756.0 1,630.7 1,819.8

First Call EPS ($) 1.72 1.74 2.04

P/E (x) 20.8 20.5 17.5

EV/EBITDA (x) 9.6 8.5 7.9


8 8 0


What drives our opinionThe LCD supply chain appears relatively healthy, as seen in increasingdemand for LCD glass and improving utilization rates. In addition toimproving fundamentals, GLW shares will likely benefit from increaseddemand from its accelerated share repurchase plan for the next fewmonths.

Despite these near-term positives, we believe shares are fairly val-ued as price declines likely offset unit growth in LCD glass, which isCorning's most important business. We also believe its other cyclicalbusinesses are near peak operating performance. Key risks to our viewinclude demand for LCD TVs, emissions control systems, and fiberoptic cable.

Corning's display business is the leader in the LCD glass market, withmore than 50% share in an oligopoly market. We believe Corning andits glass competitors Asahi Glass and Nippon Electric Glass capturethe overwhelming majority of LCD TV industry profits.

Display continues to face multiple long-term headwinds: continuedrisk from Japanese yen volatility (though somewhat mitigated by con-stant-currency reporting and currency hedges), a concentrated cus-tomer base (top three customers accounted for 62% of segment salesin 2017), and contracts that negatively tie pricing to volumes andthereby limit margin expansion.

Also, we believe LCD TV demand will likely remain sluggish and beincreasingly driven by emerging markets other than China. This is like-ly to be a negative for LCD glass demand as Chinese consumers havehistorically bought larger-size LCD TVs relative to developed markets.

While the company has adopted an aggressive capital return pro-gram, we are not more constructive given our longer-term views onCorning's cyclical businesses.

We view GLW valuation as fair given our longer-term view of its glassbusiness, the cyclicality of other businesses, and growth prospects.



Fortinet, Inc.: BellwetherFortinet is a provider of network firewalls and other IT security products. The company is differentiated by the use of itsown ASIC (application-specific integrated circuit), which helps it deliver higher performance at lower prices. Founded in2000 and headquartered in Sunnyvale, CA, Fortinet has approximately 3,000 employees globally.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

0.00 13,458 2,257.9 14,517

Consensus Forecasts (FY end) Dec 2016 Dec 2017 Dec 2018E

Sales ($M) 1,275 1,495 1,781

Net Income ($M) 129.5 184.7 291.1

EPS (adj.) 0.73 0.54 1.66

P/E (x) 117.4 158.7 51.6

EV/EBITDA (x) 56.7 21.0 24.5


10 18 2


What drives our opinionWe believe network security spending growth should remain fairlystrong despite fears of a peaking firewall market. However, whileFortinet shares offer attractive growth at a reasonable price relative tonetwork security peers, we maintain a fairly neutral view until man-agement delivers more consistent results. Key risks to our view includesecurity demand, competition, and management execution.

Although the security spending environment is more challenging,we nonetheless expect Fortinet to post continued healthy growth inbillings (revenue plus the sequential change in deferred revenue, ametric we believe better illustrates the health of the business).

Recent results were strong driven by solid execution and sales produc-tivity. We believe the company is enjoying a relatively robust replace-ment cycle. Product sales in particular were very strong, with a notice-able reacceleration that suggest the company is gaining share rela-tive to network security peers, while growing the attach rate of othersecurity services and products. Finally, it does appear that the compa-ny is seeing better execution and success in the large enterprise mar-ket, a segment that had proved difficult in the past.

While current trends are clearly strong, we are unsure as to their sus-tainability. Although FTNT shares offer attractive value relative to itsgrowth when compared to security peers, we believe this somewhatneutralized by a history of uneven execution. Looking forward, wewait to see better consistency in results before turning constructiveagain on FTNT shares.



Hewlett Packard Enterprise: BellwetherHewlett Packard Enterprise was spun out to shareholders of Hewlett-Packard on 2 November 2015. The company is aleading supplier of IT hardware, software, and services to businesses worldwide.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.97 32,608 61,406.0 24,488


Sales ($M) 28,871 30,700 31,003

Net Income ($M) 2,359.0 2,391.9 2,271.8

First Call EPS ($) 1.41 1.53 1.57

P/E (x) 12.0 11.1 10.8

EV/EBITDA (x) 4.7 5.8 5.6


7 16 0


What drives our opinionFollowing its spin-out from Hewlett Packard, Inc, we believe HewlettPackard Enterprise will be challenged by significant legacy exposuresthat are at risk as customers transition to cloud-based solutions. Weare also skeptical of HPE's ability to execute potential mergers crisply.Key risks to our view include the overall state of demand and compe-tition, and management's ability to realize the benefits of separation.

Although we are constructive on IT spending, we nonetheless wenonetheless believe Hewlett Packard Enterprise will face significantchallenges.

We believe the company still derives a significant amount of revenueand operating profit from maintenance and services related to pro-prietary hardware, which is likely to see continued pressure. HPE’snetworking performance has been uneven and does not have scaleor significant incumbency. The storage business has declined for fourconsecutive years and we are not optimistic on prospects for a returnto growth. We note that the most recent quarterly outlook highlightsthese challenges. Lastly, CEO Meg Whitman announced her retire-ment, with Antonio Neri succeeding her.

The company completed its plan for a tax-free spin out of its EnterpriseServices (ES) business to Computer Sciences Corp for a total consid-eration of approximately USD 9.5bn (50% of combined CSC/HP ES,USD 1.5bn cash, USD 2.5bn debt assumed by CSC). While this dealdoes reduce HPE's legacy exposure, it also increases its exposure tothe more cyclical hardware market. On balance, we view this deal asrelatively neutral to HPE fundamentals.



Intl Business Machines: BellwetherIBM is a leading supplier of software, services, and hardware solutions to enterprises worldwide. Through a long-runningseries of acquisitions, IBM is now one of the largest software companies worldwide by revenue. Incorporated in 1911,IBM has approximately 414,000 employees globally, and is headquartered in Armonk, NY.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

4.12 170,745 125,356.0 136,057


Sales ($M) 79,139 80,313 80,144

Net Income ($M) 12,935.0 12,662.7 12,584.2

First Call EPS ($) 13.80 13.81 14.04

P/E (x) 10.9 10.9 10.7

EV/EBITDA (x) 10.2 8.7 8.1


8 13 2


What drives our opinionIBM's valuation is relatively undemanding, but we are not more con-structive as we believe IBM faces numerous challenges as it attemptsto transition its business to the cloud. The company's growth products(“Strategic Imperatives”) include several promising products and solu-tions offerings that are growing in the double-digits and with mean-ingful scale, but this will likely continue to be more than offset bysecular and structural challenges in other parts of the business. Keyrisks to our view center on IBM's execution and demand.

As IBM transitions its software business to a cloud/subscription mod-el, the company faces a revenue headwind. In particular, we believethe company’s software business will face continued pressure from avariety of sources including open-source solutions and cheaper, morenimble cloud-based solutions. Similarly, although we think the chal-lenges to IBM’s dwindling hardware business are fairly well under-stood at this point, we believe the effects are less appreciated as bothhardware support and software generate an outsized profit contribu-tion.

Sentiment on IBM shares has recently been boosted on prospectsfor long-term success in the company's Watson "cognitive comput-ing" platform. While this may have long-term potential, we believethe near- to intermediate-term reality will remain challenging for IBMfundamentals, and see potential for further significant EPS estimatereductions, but we believe this is price in.

Finally, we believe many of IBM’s business lines will continue to seetepid demand as more customers embrace new IT architectures thatrequire less on-premise infrastructure and therefore less services andsupport. Recent results, which showed continued deterioration acrossmost of IBM's businesses, support this view.



LAM Research Corp.: BellwetherLam Research is a leading supplier of equipment used in the manufacture of semiconductors. The company providesproducts and services primarily focused on wafer fab equipment (WFE), which is used in the “front end” of semiconductormanufacturing, as well as solutions for the “back end” package and test applications. Lam Research is a fairly focusedsupplier participating primarily in the etch sub-segment; it is a leader in the deposition market where it is the No. 2vendor. Lam Research’s relatively high exposure to the DRAM and NAND memory market (approximately 60% of revenuein FY2016) is somewhat unique among larger semiconductor equipment vendors. Lam Research was founded in 1980and is headquartered in Fremont, CA. The company has approximately 7,500 employees worldwide.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.66 25,239 12,479.5 24,140

Consensus Forecasts (FY end) Jun 2018 Jun 2019E Jun 2020E

Sales ($M) 11,077 10,471 11,503

Net Income ($M) 2,380.7 2,475.6 2,854.9

First Call EPS ($) 17.87 15.61 18.08

P/E (x) 8.7 9.9 8.6

EV/EBITDA (x) 7.0 7.7 6.4


19 3 0


What drives our opinionWe believe LRCX shares currently price in expectations for a prolongedstrong outlook for WFE spend. While there is some required spendrelated to manufacturing upgrades, we believe there is downside riskdue to still-tepid semiconductor demand in such areas as PCs andsmartphones, along with a fairly concentrated customer base. Keyrisks to our view include demand for semiconductor capital equip-ment, and demand for products in key end-markets including PCs,smartphones, and memory.

Lam Research’s relatively high exposure to the DRAM and NANDmemory market (approximately 60% of revenue) is somewhat uniqueamong larger semiconductor equipment vendors.

We note that although DRAM and NAND memory prices have beenstrong over the past few quarters and may remain healthy for sometime, this is an inherently cyclical end-market and spending willinevitably decline. While there is some spending due to manufactur-ing process transitions, we believe investment will be constrained asmemory vendors attempt to maintain healthy pricing.

Furthermore, although these technology transitions will almost cer-tainly occur, our concern is that orders for this equipment could easilybe pushed out a few quarters. If this were to occur, we believe esti-mates for the group will be reduced and valuations will likely compressfurther, resulting in continued share price pressure and likely under-performance versus the broader market.

Alternatively, over the next six to 12 months, even if semiconductororders were to materialize as expected, we believe there would besignificant skepticism as to sustainability unless investors have convic-tion that demand for smartphones and other electronics is improving.



Micron Technology: BellwetherMicron is leading producer of memory products including DRAM and NAND. In addition to its own captive manufacturingassets, the company also has several joint ventures including 33% interest in Inotera, a DRAM manufacturer; and 51%in IM Flash Technologies, a NAND manufacturer, with Intel. We estimate that DRAM accounts for approximately 65%of revenues, NAND flash for 33% of revenue, and other products for 2% of revenue. By end market, PCs accountfor approximately 20% of revenue, servers 20%, mobile (smartphones, feature phones, and tablets) 20%; consumer/removable storage 15%, and other/specialty 25%. Micron was founded in 1978 and is headquartered in Boise, ID. Thecompany has approximately 30,000 employees worldwide.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

0.00 56,796 35,336.0 52,261

Consensus Forecasts (FY end) Aug 2018 Aug 2019E Aug 2020E

Sales ($M) 30,210 32,223 31,152

Net Income ($M) 13,841.9 13,117.5 11,015.8

First Call EPS ($) 11.77 11.17 9.73

P/E (x) 3.8 4.0 4.6

EV/EBITDA (x) 4.1 3.1 2.6


22 9 0


What drives our opinionWhile longer-term industry fundamentals are positive, we see near-to intermediate-term risks to memory pricing.

Longer-term, Micron should benefit from a combination of industryand company-specific factors. Related to the memory industry, weexpect: 1) healthy DRAM pricing based on low supply growth andreasonably healthy demand; 2) diversified demand; and 3) the finallyrealized benefits of a consolidated industry. Specific to Micron, weexpect continued progress on manufacturing technology transitionsthat will improve the cost structure. Key risks include memory marketsupply/demand and company execution.

Longer-term we believe the industry is healthy. After a prolonged peri-od of relentless price declines, the memory market (especially DRAM),industry pricing stabilized last year due to a combination of secularand cyclical forces including industry consolidation, relatively healthydemand, and more rational supply. This drove memory pricing signif-icantly higher.

On the demand side, optimism is supported by expected higher mem-ory content for DRAM and NAND in smartphones and the increasinguse of NAND memory in Enterprise storage and notebook PCs.

Supply side concerns for DRAM are alleviated by industry supplyleader Samsung recently indicated only modest supply growth. NANDshould likewise see a constructive supply/demand balance as theindustry's transition to a new manufacturing technology crimps sup-ply in the near- to intermediate-term.

Micron's cost profile should improve over the coming quarters as ittransitions and ramps more advanced manufacturing nodes, makingits products more price competitive. Furthermore, we expect the com-pany to de-lever its balance sheet materially.



Qualcomm Inc: BellwetherQualcomm is the leading provider of semiconductor solutions for the wireless communications market. The companyalso generates significant revenue and operating profit from the licensing of its intellectual property. Founded in 1985,Qualcomm is headquartered in San Diego, CA and has approximately 31,000 employees.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

3.15 96,698 65,486.0 108,804


Sales ($M) 23,235 22,460 22,888

Net Income ($M) 6,386.0 5,339.3 5,297.3

First Call EPS ($) 4.28 3.60 4.60

P/E (x) 17.2 20.4 16.0

EV/EBITDA (x) 7.1 15.3 14.1


13 9 1


What drives our opinionThe company has abandoned its plan to acquire NXP Semiconduc-tors and instead is focusing on internal execution and is aggressive-ly buying back stock. While these are positive measures, we believeQualcomm faces structural challenges due to its near total reliance onthe smartphone market. We see potential challenges to its licensingmodel as a share price headwind that is unlikely to abate in the near-term. Key risks to our view include smartphone demand, litigation,licensing issues, mergers and acquisitions, and execution.

We believe Qualcomm will face difficulty growing its business givenchallenges in its key end market. We believe the smartphone industryis peaking due to market maturity and less differentiated products,which combine to lengthen replacement cycles and depress industryunit sales. Additionally, incremental new subscriber growth is drivenprimarily by emerging markets, as developed markets are largely sat-urated.

Although Qualcomm is the market share leader, average selling prices(ASPs) and margins in its wireless chipset business segment have erod-ed sharply. We don’t expect growth to see material acceleration givensaturation.

Qualcomm's licensing revenue, which has an outsized impact onoperating income given its high margins, will likely face continuedpressure going forward as we expect the smartphone market mixshifting to lower-ASP devices. Finally, the licensing business modelitself is under pressure from regulators and at customers, as seen inthe recent action filed by Apple; we view this as an ongoing risk.

We are skeptical of management's ability to successfully and prof-itably enter new markets given a track record of extremely limitedsuccess.



TE Connectivity: BellwetherTE Connectivity is a leader in the still-fragmented connectors market and a significant vendor in the rapidly growing sensorsmarket. TEL was spun out from the Tyco Electronics conglomerate in a 2007 IPO. TEL is headquartered in Switzerlandand has 83,000 employees globally. The company is exposed to a diverse group of end-markets including autos (40%),communications (22%), industrial equipment (11%), energy (approx. 10%), commercial transportation (6%), aerospaceand defense (approx. 5%), and energy (approximately 6%).

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.82 35,643 19,403.0 32,079


Sales ($M) 13,113 14,642 15,332

Net Income ($M) 1,730.0 1,975.6 2,101.0

First Call EPS ($) 4.83 5.58 6.04

P/E (x) 18.8 16.2 15.0

EV/EBITDA (x) 14.6 11.1 10.2


10 4 0


What drives our opinionLonger term, TE Connectivity should benefit from its focus on prod-ucts that are differentiated and earn attractive margins. However, thecompany may face near-term headwinds from the auto market.

Although the auto market (~40% of company revenue) is an attrac-tive secular opportunity for increased electronic content, near-termdynamics are likely challenging. US auto sales have plateaued, domes-tic auto dealer inventories are high, auto credit quality is deterioratingat the margin, and production cuts may be necessary. Key risks to ourview include end-market demand, competition, and potential M&A.

Although much of the connector market is commoditized, the com-pany has continually focused on markets and solutions where it canprovide a differentiated and higher-margin offering. TE Connectivityis increasingly shifting its portfolio to providing solutions for harshenvironments, which should see strong growth as more devices,autos, and industrial equipment become connected. The companyhas smartly divested product lines, such as its Broadband Networksbusiness, to focus on higher-margin products. Finally, it has also madetargeted acquisitions to expand its presence in the sensors market,another area we believe will benefit from secular trends such as con-nected cars and autonomous driving.

Along with revenue growth, the company's focus on differentiatedproducts and manufacturing scale should drive continued healthyoperating margins.

TE Connectivity continues to pursue targeted M&A, but we do notanticipate any major acquisitions for the next few years. The companyis using the USD 3bn proceeds from its Aug. 2015 Broadband Net-works sale to repurchase its stock, and we expect it to continue tofocus on capital return through buybacks and dividends.



Texas Instruments Inc.: BellwetherTexas Instruments engages in the manufacture, design, and sale of digital signal processors and analog semiconductors.It operates in three segments: semiconductor; sensors and controls; and educational and productivity solutions.The semiconductor segment designs, manufactures, and sells integrated circuits. Its core products include analogsemiconductors and digital signal processors. The company was founded in 1930 and is headquartered in Dallas, TX.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

2.31 106,984 17,642.0 104,385


Sales ($M) 14,961 16,107 16,749

Net Income ($M) 3,682.0 5,661.3 6,097.6

EV/EBITDA (x) 14.6 14.2 13.5

First Call EPS ($) 4.36 5.66 6.19

P/E (x) 25.2 19.4 17.7

P/E (x) 24.9 19.2 17.5


13 16 2


What drives our opinionWe view Texas Instruments as a high-quality leader in the highlyfragmented USD 44bn analog semiconductor market and the USD18bn embedded processors market. While there are some uncertain-ties related to near-term demand, we believe this is largely reflectedin expectations Valuation has recently corrected, setting up a moreattractive entry point. Key risks to our view include economic growth,competition, and end-market demand.

Texas Instruments recognized the structural shift in the semiconduc-tor market to a slower growth profile earlier than most in the indus-try and adjusted its strategy accordingly by focusing on manufactur-ing scale, operating expense control, and targeted acquisitions. Thecompany also increased its focus on capital return through dividendsand significant share repurchases. The result has been EPS and divi-dends-per-share compounded growth of 8% and 24% over the pastseven fiscal years, respectively, even as revenue grew less than 1%compounded over the same period.

While Texas Instruments has executed well, the near-term is cloudedby higher inventories and declining lead-times. However, longer-term,the company should benefit from the continued transition of its man-ufacturing to more efficient 300mm technologies.

Texas Instruments shares currently trade in the middle of their histor-ical five-year range for multiple valuation metrics. We do not expectthe company to make further significant acquisitions, and believeTXN shares offer attractive defensive qualities in a choppier demandenvironment due to its margin structure and capital return program,which has been a highly effective driver for the company's share price.



VMware, Inc: BellwetherVMware is the market share leader in server virtualization. The company also provides software for virtualized networking,virtualized storage, mobile device management, desktop virtualization/desktop-as-a-service, and management tools. Theseofferings combine to constitute VMware’s vision for the Software-Defined Data Center. The company also offers a hybridcloud service. VMware is 80% owned by EMC Corp, which was acquired by Dell.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

0.00 53,215 20,693.0 61,617


Sales ($M) 7,922 8,828 9,551

Net Income ($M) 2,145.0 2,548.7 2,726.9

First Call EPS ($) 5.19 6.16 6.60

P/E (x) 29.6 24.9 23.3

EV/EBITDA (x) 14.9 11.1 8.3


12 12 1


What drives our opinionVMware is a leader in server virtualization with interesting efforts instorage and network virtualization. Following the acquisition of EMCCorp by Dell, VMware is now a subsidiary of Dell with only 20%of outstanding shares publicly traded. Privately held Dell has publiclydiscussed buying in and converting the DVMT tracking stock (whichtracks VMW) to Dell Class C, effectively taking Dell Corp public. How-ever, the ultimate outcome is still uncertain. We see risk due to thelimited float, Dell's ownership, saturation of key end-markets, andlimited success so far in non-core products.

We believe VMware shares are fairly valued at current levels as theyessentially discount reasonable growth in the high-value, recurringcash flow from software maintenance fees paid by existing VMwarecustomers. This may be fair to slightly aggressive given the saturationof server virtualization, which accounts for more than 80% of work-loads. There is potential for further growth in virtualization if mis-sion-critical workloads, which typically run on dedicated hardware,are ported to virtualized environments. This could happen over time,especially given the strides we believe VMware has made in manage-ment tools. However, we also acknowledge that VMware's dominantinstalled base and more than 90% revenue share could be at risk fromopen source solutions, newer virtualization technologies, and publiccloud displacement.

We see limited upside from current levels given what we see as limitedgrowth prospects and the uncertainty of the impact on VMware'sexecution and positioning following the acquisition of EMC by Dell.

Finally, Dell has discussed alternatives to its current ownership struc-ture of VMW, including an acquisition or a reverse merger into VMW.Given this uncertainty, it is difficult to have a more constructive viewon shares of VMW.



Sector financial highlights - Information Technology

Name Ticker Rec Price Industry Group Mkt P/E 1 yr DivHigh Low Cap* forward Yld (%)

Accenture Plc Class A ACN Most Preferred 172.82 IT Services 175.64 132.27 Large 23.6 1.54

Akamai Technologies, Inc. AKAM Bellwether 72.83 IT Services 83.08 46.97 Large 19.8 0.00

Alliance Data Systems Corporatio ADS Not Rated 243.07 IT Services 278.33 192.02 Large 9.7 0.91

Automatic Data Processing, Inc. ADP Not Rated 148.89 IT Services 151.01 106.29 Large 27.8 1.69

Broadridge Financial Solutions, In BR Not Rated 134.15 IT Services 138.24 79.67 Large 28.1 1.09

Cognizant Technology Solutions CTSH Bellwether 76.82 IT Services 85.10 69.69 Large 15.6 0.97

DXC Technology Co. DXC Not Rated 94.84 IT Services 107.85 77.96 Large 11.0 0.77

Fidelity National Information Serv FIS Not Rated 109.81 IT Services 110.83 89.31 Large 19.3 1.11

Fiserv, Inc. FISV Not Rated 81.68 IT Services 81.87 60.19 NA 23.8 0.00

FleetCor Technologies, Inc. FLT Not Rated 225.69 IT Services 227.15 149.72 Large 19.5 0.00

Gartner, Inc. IT Not Rated 160.00 IT Services 159.92 111.57 Large 37.8 0.00

Global Payments Inc. GPN Not Rated 127.86 IT Services 129.25 92.97 Large 22.2 0.03

International Business Machines IBM Bellwether 148.91 IT Services 171.13 137.45 Large 10.7 4.09

Mastercard Incorporated Class A MA Most Preferred 222.12 IT Services 223.37 137.75 Large 30.7 0.44

Paychex, Inc. PAYX Not Rated 73.72 IT Services 75.57 58.22 Large 25.2 2.84

PayPal Holdings Inc PYPL Not Rated 90.04 IT Services 93.70 62.37 Large 33.3 0.00

Total System Services, Inc. TSS Not Rated 98.78 IT Services 100.39 64.56 Large 20.8 0.53

VeriSign, Inc. VRSN Not Rated 160.49 IT Services 164.19 102.84 Large 31.8 0.00

Visa Inc. Class A** V Most Preferred 149.58 IT Services 150.26 102.75 Large 28.2 0.55

Western Union Company WU Not Rated 18.77 IT Services 22.21 18.38 Mid 9.8 3.89

Adobe Systems Inc ADBE Most Preferred 267.84 Software 277.61 143.95 Large 35.0 0.00

ANSYS, Inc. ANSS Not Rated 184.99 Software 190.45 119.20 Large 34.9 0.00

Autodesk, Inc. ADSK Not Rated 155.40 Software 159.94 101.55 Large NA 0.00

CA, Inc. CA Not Rated 44.06 Software 44.25 31.45 Large 15.6 2.31

Cadence Design Systems, Inc. CDNS Not Rated 45.42 Software 47.40 35.49 Large 25.2 0.00

Citrix CTXS Not Rated 111.28 Software 116.82 75.19 Large 19.2 0.00

Intuit INTU Not Rated 221.96 Software 229.86 140.21 Large 33.6 0.71

Microsoft Corporation MSFT Most Preferred 114.45 Software 115.29 72.92 Large 25.9 1.47

Oracle Corporation ORCL Most Preferred 51.72 Software 53.48 42.57 Large 14.9 1.48

Red Hat, Inc. RHT Most Preferred 135.56 Software 177.70 104.51 Large 36.1 0.00

salesforce.com, inc. CRM Most Preferred 158.87 Software 158.91 92.11 Large 59.9 0.00

Symantec Corporation SYMC Not Rated 21.20 Software 33.92 17.81 Large 13.1 1.38

Synopsys, Inc. SNPS Not Rated 98.84 Software 103.40 79.00 Large 23.6 0.00

Arista Networks, Inc. ANET Not Rated 274.56 Communications Equip 313.37 177.92 Large 33.4 0.00

Cisco Systems, Inc. CSCO Most Preferred 48.47 Communications Equip 48.64 32.64 Large 16.0 2.56

F5 Networks, Inc. FFIV lid Security FFIV 196.82 Communications Equip 196.50 114.63 Large 18.9 0.00

Juniper Networks, Inc. JNPR Most Preferred 29.79 Communications Equip 29.95 23.61 Large 15.2 2.16

Motorola Solutions, Inc. MSI Not Rated 129.92 Communications Equip 129.44 82.86 Large 17.6 1.57

Apple Inc. AAPL Bellwether 222.19 Tech Hdwre Stge & Periph 229.67 149.16 Large 16.4 1.23

Hewlett Packard Enterprise Co. HPE Bellwether 16.55 Tech Hdwre Stge & Periph 19.48 12.82 Large 10.6 1.94

HP Inc. HPQ Most Preferred 25.56 Tech Hdwre Stge & Periph 26.14 19.31 Large 11.9 2.13

NetApp, Inc. NTAP Not Rated 86.19 Tech Hdwre Stge & Periph 88.08 41.70 Large 18.7 1.16

Seagate Technology PLC STX Not Rated 48.49 Tech Hdwre Stge & Periph 62.70 32.41 Large 7.8 5.13

Western Digital Corporation WDC Not Rated 59.68 Tech Hdwre Stge & Periph 106.96 53.61 Large 5.2 3.34

Xerox Corporation XRX Not Rated 27.14 Tech Hdwre Stge & Periph 37.42 23.52 Mid 7.8 3.67

Amphenol Corporation Class A APH Not Rated 94.05 Elec Equip Instr & Compon 97.56 80.42 NA 24.1 0.84

Corning Inc GLW Bellwether 35.51 Elec Equip Instr & Compon 36.56 26.11 Large NA 1.95

FLIR Systems, Inc. FLIR Not Rated 61.76 Elec Equip Instr & Compon 63.88 38.67 Mid 26.1 1.03

52 week



Sector financial highlights - Information Technology

Name Ticker Rec Price Industry Group Mkt P/E 1 yr DivHigh Low Cap* forward Yld (%)

52 week

IPG Photonics Corporation IPGP Not Rated 161.46 Elec Equip Instr & Compon 264.11 153.37 Mid 18.9 0.00

TE Connectivity Ltd. TEL Bellwether 89.38 Elec Equip Instr & Compon 108.23 80.93 Large 14.8 1.85

Advanced Micro Devices, Inc. AMD Not Rated 32.57 Semicon & Semicon Equip 34.14 9.04 Large 53.1 0.00

Analog Devices, Inc. ADI Not Rated 92.56 Semicon & Semicon Equip 103.59 80.95 Large 15.6 1.99

Applied Materials, Inc. AMAT Bellwether 38.58 Semicon & Semicon Equip 62.40 37.39 Large 8.9 1.53

Broadcom Inc. AVGO Bellwether 247.65 Semicon & Semicon Equip 285.68 197.46 Large 11.5 2.51

Intel Corporation INTC Most Preferred 45.91 Semicon & Semicon Equip 57.60 36.85 Large 10.9 2.50

KLA-Tencor Corporation KLAC Not Rated 102.36 Semicon & Semicon Equip 123.96 96.12 Large 11.3 2.57

Lam Research Corporation LRCX Bellwether 151.29 Semicon & Semicon Equip 234.88 149.02 Large 9.5 1.65

Microchip Technology Inc MCHP Not Rated 78.77 Semicon & Semicon Equip 104.20 78.33 Large 11.0 1.77

Micron Technology, Inc. MU Bellwether 44.64 Semicon & Semicon Equip 64.66 34.09 Large 4.3 0.00

NVIDIA Corporation NVDA Not Rated 268.41 Semicon & Semicon Equip 285.22 170.16 Large 35.1 0.23

Qorvo, Inc. QRVO Not Rated 76.25 Semicon & Semicon Equip 86.84 64.53 Mid 11.5 0.00

QUALCOMM Inc QCOM Bellwether 72.74 Semicon & Semicon Equip 76.50 48.56 Large 16.0 3.17

Skyworks Solutions, Inc. SWKS Not Rated 91.73 Semicon & Semicon Equip 117.65 83.05 Large 11.7 1.44

Texas Instruments Inc TXN Bellwether 107.55 Semicon & Semicon Equip 120.75 86.50 Large 17.8 2.26

Xilinx, Inc. XLNX Not Rated 77.36 Semicon & Semicon Equip 79.88 62.27 Large 24.8 1.79

*Small (<USD 2bn), Mid (USD 2-10bn), Large (>USD 10bn) **Mastercard and Visa covered by Brad Ball

Source: Factset, UBS as of 25 Sep 2018



Sector Snapshot - Information Technology

Software & Services Technology Hardware & Equip Semiconductor Sector

Weighting Most Preferred Neutral Neutral

Key Themes Transformational Technologies Transformational Technologies Transformational TechnologiesCloud Cloud Cloud

Democratization of IT Underappreciated growth in tech Underappreciated growth in techSecurity

Democratization of IT

Performance (%)Absolute1 month 0.7% 2.3% 0.8% 1.2%3 months 4.1% 15.6% -1.3% 5.9%6 months 18.5% 26.1% 4.5% 17.9%12 months 30.1% 42.5% 24.3% 32.1%

Relative1 month -1.2% 1.2% -0.4%3 months 0.0 9.7% -7.2%6 months 0.5% 8.2% -13.4%12 months -2.0% 10.4% -7.8%

No of companies in subsector 33 17 15 65Subsector Market Cap (USD m) 2,657,450.63 1,519,565.27 956,474.72 5,133,490.62Subsector weightings 51.77% 29.60% 18.63% 100.00%

Top subsector weights (%)MSFT 33.1% AAPL 66.7% INTC 22.6% AAPL 19.7%

V 10.0% CSCO 14.6% NVDA 16.9% MSFT 17.1%MA 7.6% HPQ 2.7% AVGO 11.3% V 5.2%

ORCL 5.5% TEL 2.1% TXN 11.2% CSCO 4.3%IBM 5.2% GLW 1.9% QCOM 10.8% INTC 4.2%

ADBE 4.9% APH 1.9% MU 5.5% MA 3.9%CRM 4.5% HPE 1.6% AMAT 4.0% NVDA 3.1%ACN 4.2% NTAP 1.5% ADI 3.7% ORCL 2.8%PYPL 4.0% MSI 1.4% AMD 2.9% IBM 2.7%ADP 2.5% WDC 1.1% LRCX 2.5% ADBE 2.5%

Source: Factset, UBS as of 25 Sep 2018

Weighting definitions--Most Preferred: The subsector is expected to outperform the sector benchmark in the next 12 months. Neutral: The subsector is expected to perform broadly in line with the sector benchmark in the next 12 months. Least Preferred: The subsector is expected to underperform the sector benchmark in the next 12 months.



Recent recommendationsCompany Change CommentAccenture Plc Most Preferred We believe ACN is a leader in the structurally attractive IT services

sector. Although there is some headwind from the transition tocloud, we expect IT spending will finally show material accelerationin 2018. Despite its size, ACN should see revenue outperformanceversus the industry as it leverages its expertise in Digital (digitalmarketing, analytics, mobility) and Technology (systems integration,application outsourcing, software solutions, IT delivery). The companyhas also shown admirable success in accretive acquisitions. However,our positive fundamental view is balanced by a relatively rich valuation.

Adobe Systems Most Preferred We expect Adobe to continue to benefit from the ongoing transitionto a subscription model, which allows the company to increase averagerevenue per user. The company should also benefit from an increasedfocus by its customers on digital marketing campaign management.

Cisco Systems Inc. Most Preferred We believe Cisco will benefit from new product cycles in switching,an improvement in overall IT spending, and the company's increasedfocus in security. We believe valuation is also attractive relative tofundamentals, peers, and the company's own history.

HP Inc. Most Preferred We expect HP to benefit from continued share gains in a stable PCmarket. More importantly, the company has stabilized its traditionalprinting supplies business and should be successful in its effortsto break into the commercial copier and the A3 printing markets.Additionally, we believe HP is well-positioned in the still-nascent 3Dprinting market.

Intel Corp. Most Preferred Stability in Intel's PC business should be complemented by growth inthe Data Center Group, which provides processors used in traditionalservers and for cloud-based computing. The company should alsobenefit from narrowing losses in its mobile business.

Juniper Networks Inc. Most Preferred We believe carrier spending on routing will improve through 2H16 and2017, along with healthy enterprise, cloud, and Web 2.0 spending. Inaddition, we expect gross margins to improve based on demand, mix,and new product cycles. Company results should outpace consensusexpectations over the next 12 to 18 months as operating margins postmodest, steady improvement toward the company's 25% target. Wefind valuation attractive given our expectations.

Microsoft Corp. Most Preferred We believe Microsoft is managing the transition of its business tothe cloud better than most peers, and should benefit over time fromits transition to cloud-based, recurring revenue model. While sharesare not "cheap" we believe MSFT offers an attractive mix of growththrough its cloud business and defensive characteristics due to itsrecurring revenue model, high cash flow, and likely capital return.

Oracle Corp. Most Preferred Although Oracle is challenged on multiple fronts, we believe estimateshave likely troughed and expect accelerating revenue growth in itscloud offering along with stability in its core database business. Webelieve valuation is extremely attractive relative to peers.

Red Hat Most Preferred We expect Linux to gain server operating share, benefiting RHT's paidLinux franchise. Red Hat should also benefit from the acceleratingadoption of open source middleware solutions.



Salesforce.com Most Preferred We expect Salesforce.com to continue to benefit from new customeradditions, additional sales into existing customers of add-on products,and modest margin expansion as revenues grow faster than expenses.We expect further share gains as the company benefits from continuedinvestments in its sales and R&D efforts. Additionally, the company hasa proven track record of upselling additional products into the existingcustomer base.

Splunk Most Preferred We see Splunk as a leading horizontal software platform in the BigData market. Splunk should continue to see strong revenue and billingsgrowth driven by continued adoption by new users as well as strongrenewal rates and upsell activity into its installed base. Margins and cashflow should improve over time, but the company plans to continue toinvest aggressively in the intermediate term to capitalize on its marketopportunity, which is the correct strategy in our view. However, thesefundamental positives are offset by relatively rich valuation.

Akamai Technologies Bellwether We view Akamai's current stock price and valuation as fair given themix of risks and opportunities facing the company. Akamai is facingsignificant competition from leading Web 2.0 and cloud companies,who were formerly "anchor tenants" for the company. At the sametime, the rise of 4K video may present a longer-term opportunity. Thesecross currents have resulted in a material slowdown in growth for thecompany's Media Delivery Solutions segment (33% of FY16 revenue).Key risks to our view include the overall demand for CDN and securitysolutions, the competitive environment, and network costs.

Apple Inc. Bellwether We believe Apple faces structural growth headwinds due the maturityof the smartphone market. iPhone sales in developed markets facea headwind from a lengthening replacement cycle, while emergingmarkets require significantly lower priced products. These factorscombined point towards difficulty in sustainably growing the largestpart of Apple's revenue. Apple's services offerings (Apple Music,iCloud, Apple Pay, and others) have grown significantly, but maybe challenged by a slower growth in the iPhone installed base. Thecompany will likely return significant capital to shareholders as a resultof offshore profit repatriation, but after this we see a dearth of catalysts.

Applied Materials Inc. Bellwether We believe AMAT shares will be largely range-bound until there isclarity on the outlook for WFE spend and, more importantly, until thereis confidence in demand for semiconductors, which will likely requirestability in the PC market and upside to consensus expectations forsmartphone growth.

Broadcom Corp. Bellwether Broadcom management has done an admirable job of acquiring andintegrating assets to drive margin improvement, but the company'sunderlying organic growth prospects are unclear. With the proposedQualcomm acquisition now off the table, we believe Broadcom willneed to pursue other acquisitions. At the same time, we believe thecompany will face headwinds from its reliance on Apple in its wirelessbusiness.

Cognizant Technology Bellwether Although we believe IT services companies such as Cognizant are wellpositioned to capitalize on the ongoing demand for outsourced ITservices and consulting, we nonetheless believe the company will beuniquely challenged by its outsize exposure to the financial servicesvertical (around 40% of revenue) given continued challenges in thatindustry that have only been exacerbated by the recent Brexit vote.



Corning Bellwether Longer-term, we believe the LCD glass business will see unit growthoffset by pricing pressure. Other businesses (fiber optic cable, emissionscontrol) are likely at cyclical peaks. An aggressive capital return programprovides near-term support, but may limit longer-term financialflexibility. Valuation is fair given longer-term prospects.

Fortinet, Inc. Bellwether Concerns over management's execution and ability to improve marginsoffset our positive views on industry demand, company positioning,and valuation.

Hewlett Packard Enterprise Bellwether We do not believe the spin-out of Hewlett Packard Enterprise willmaterially unlock value. We believe the business remains challenged bysignificant legacy exposures that are at risk as customers transition tocloud-based solutions. We are also skeptical of HPE's ability to executemergers crisply.

Intl Business Machines Bellwether We expect IBM to continue to struggle to find revenue growth giventhe company's size and exposure to legacy products and servicesthat we believe are at significant risk as customers transition their ITarchitectures to the cloud. However, these fundamental challenges arelikely offset by undemanding valuation.

LAM Research Corp. Bellwether We believe LRCX shares currently price in expectations for a prolongedstrong outlook for WFE spend. While there is some required spendrelated to manufacturing upgrades, we believe there is downside riskdue to still-tepid semiconductor demand in such areas as PCs andsmartphones.

Micron Technology Bellwether While longer-term industry fundamentals are positive, we see near- tointermediate-term risks to memory pricing.

Qualcomm Inc Bellwether We believe slowing smartphone growth and an industrywide shift tolower-priced smartphones will be a headwind to Qualcomm's chipsetbusiness, but more importantly to its licensing business, which is themain driver of earnings. We fail to see the industrial logic of thecompany's proposed acquisition of NXP Semiconductor.

TE Connectivity Bellwether Longer-term, TE Connectivity should benefit from its focus on productswhere it can deliver a differentiated solution and thereby earn attractivemargins. However, in the near-term, we believe the company may bechallenged by a slowdown in auto production that will more than offsetincreased electronics penetration. Key risks to our view include end-market demand, competition, and potential M&A.

Texas Instruments Inc. Bellwether We view TXN as a high-quality analog semiconductor company. Thecompany should benefit from its continued transition to 300mmmanufacturing. TXN shares currently trade in the middle of theirhistorical five-year range for multiple valuation metrics, and we believeTXN shares offer attractive defensive qualities in a choppier demandenvironment due to its margin structure and capital return program.

VMware, Inc Bellwether VMware is attractively priced but we think there is too muchuncertainty around the future growth for its virtualization products.Additionally, the purchase of EMC (which owns 80% of VMW shares)by Dell raises questions about the longer-term management andownership structure of the business.



Appendix

NotesThe benchmark allocation, as well as the tactical deviations, are intended to be applicable to the USequity portion of a portfolio across investor risk profiles.1 The benchmark allocation is based on S&P500 weights.2 See " Deviations from strategic asset allocation " in the Appendix of UBSHouse View for an explanation regarding the interpretation of the suggested tactical devia-

tions from benchmark. The current olumn refers to the tactical deviation that applies as of the date of this publication. The previous olumn refers to the tacticaldeviation that was in place at the date of the previous edition of the previous edition of UBSHouse View or the last UBSHouse View Update.

3 The current allocation column is the sum of the S&P500 benchmark allocation and CIO GWM tactical deviation columns.

US equity sector allocat ion, in %

S&P500 CIOGWM tactical deviation2 CurrentBenchmark Numeric Symbol allocation3

allocation1 Previous Current Previous Current

Consumer Discretionary 10.1 +0.0 +0.0 n n 10.1

Consumer Staples 6.8 5.8

Energy 5.9 +1.0 +1.0 + + 6.9

Financials 13.7 +2.0 +2.0 ++ ++ 15.7

Healthcare 14.8 13.8

Industrials 9.9 8.9

Information Technology 20.9 +0.0 +0.0 n n 20.9

Materials 2.5 +0.0 +0.0 n n 2.5

Real Estate 2.7 +0.0 +0.0 n n 2.7

Communication services 9.9 +0.0 +0.0 n n 9.9

Utilit ies 2.9 +0.0 +0.0 n n 2.9

NOTE: The benchmark allocations, as well as the tactical deviations, are intended to be applicable to the USequity portion of a portfolio across investor risk profiles.Source: UBS, as of 20 September 2018. After the close on 21 September 2018, the Telecommunication Services sector will be renamed Communication Services. This newsector will include the existing telecom providers as well as media and entertainment stocks from the Consumer Discretionary sector and internet service companies fromthe Information Technology sector.

Disclosures (25 September 2018)Accenture Plc 1, 2, 3, 4, 5, Adobe Systems 1, 2, 3, 4, 5, Akamai Technologies 2, 3, 4, 5, Apple Inc. 2, 3, 4, 6, 7,Applied Materials Inc. 2, 3, 4, Broadcom Corp. 2, Cisco Systems Inc. 2, 3, 4, 6, 8, 9, 10, Cognizant Technology 2, 3, 4,6, 10, Corning 2, 3, 4, Fortinet, Inc. 1, 2, 5, Hewlett Packard Enterprise 2, 6, 10, 11, HP Inc. 2, 3, 4, 6, 10, 11, 16; IntelCorp. 2, 3, 4, 5, 6, 8, 9, 10, 11, Intl Business Machines 2, 3, 4, 6, 11, Juniper Networks Inc. 2, LAM Research Corp. 2,Micron Technology 2, 7, Microsoft Corp. 2, 3, 4, 6, 7, 8, 9, 10, 11, 12, Oracle Corp. 2, 3, 4, Qualcomm Inc 2, 3, 4, 6,10, 13, Red Hat 1, 2, 3, 4, 5, 6, 10, Salesforce.com 2, 3, 4, Splunk 2, 8, 15, TE Connectivity 2, 14, Texas InstrumentsInc. 2, 3, 4, 5, VMware, Inc 2, 3, 4, 6, 7, 8, 9, 10,

1. UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of a class of this company's common equitysecurities as of last month's end (or the prior month's end if this report is dated less than 10 days after the most recentmonth's end).2. UBS Securities LLC makes a market in the securities and/or ADRs of this company.3. This company/entity is, or within the past 12 months has been, a client of UBS Financial Services Inc, and non-investment banking securities-related services are being, or have been, provided.4. Within the past 12 months, UBS Financial Services Inc has received compensation for products and services otherthan investment banking services from this company.5. UBS Financial Services Inc., its affiliates or subsidiaries owns a net long position exceeding 0.5% of the total issuedshare capital of this company.6. Within the past 12 months, UBS Securities LLC and/or its affiliates have received compensation for products andservices other than investment banking services from this company/entity.7. UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month'send (or the prior month's end if this report is dated less than 10 working days after the most recent month's end).8. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment bankingservices from this company/entity or one of its affiliates.



Appendix

9. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investmentbanking services are being, or have been, provided.10. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-investmentbanking securities-related services are being, or have been, provided.11. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-securitiesservices are being, or have been, provided.12. The UBS Wealth Management strategist, a member of his or her team, or one of their household members has along common stock position in this company.13. UBS Securities LLC is acting as financial advisor to Elliott Advisors (UK) Limited in regards to its economic interest inNXP Semiconductors N.V. (NXP) and to NXP's definitive agreement to be acquired by Qualcomm Inc.14. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment bankingservices from this company/entity within the next three months.15. The equity analyst covering this company, a member of his or her team, or one of their household members has along common stock position in this company.16. An employee of UBS AG is an officer, director, or advisory board member of this company.

Required Disclosures

For a complete set of required disclosures relating to the companies that are the subject of this report, please mail arequest to UBS CIO Americas, Wealth Management Business Management, 1285 Avenue of the Americas, 20th Floor,Avenue of the Americas, New York, NY 10019.

Companies mentioned in this report (25 September 2018):Apple Inc. (AAPL - Bellwether, $222.19), Accenture Plc (ACN - Most Preferred, $172.82), Adobe Systems (ADBE - MostPreferred, $267.84), Akamai Technologies (AKAM - Bellwether, $72.83), Applied Materials Inc. (AMAT - Bellwether,$38.58), Broadcom Corp. (AVGO - Bellwether, $247.65), Salesforce.com (CRM - Most Preferred, $158.87), CiscoSystems Inc. (CSCO - Most Preferred, $48.47), Cognizant Technology (CTSH - Bellwether, $76.82), Fortinet, Inc. (FTNT- Bellwether, $89.51), Corning (GLW - Bellwether, $35.51), Hewlett Packard Enterprise (HPE - Bellwether, $16.55),HP Inc. (HPQ - Most Preferred, $25.56), Intl Business Machines (IBM - Bellwether, $148.91), Intel Corp. (INTC - MostPreferred, $45.91), Juniper Networks Inc. (JNPR - Most Preferred, $29.79), LAM Research Corp. (LRCX - Bellwether,$151.29), Microsoft Corp. (MSFT - Most Preferred, $114.45), Micron Technology (MU - Bellwether, $44.64), OracleCorp. (ORCL - Most Preferred, $51.72), Qualcomm Inc (QCOM - Bellwether, $72.74), Red Hat (RHT - Most Preferred,$135.56), Splunk (SPLK - Most Preferred, $117.47), TE Connectivity (TEL - Bellwether, $89.38), Texas Instruments Inc.(TXN - Bellwether, $107.55), VMware, Inc (VMW - Bellwether, $158.06)

Analyst certification

Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that withrespect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflecthis 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 researchreport.

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.



Appendix

Required Disclosures

CIO Americas, Wealth Management equity selection systemEquity sector strategists provide three equity selections: Most Preferred (MP), Least Preferred (LP) and Bellwetherdesignation.

Rating DefinitionsMost 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 thenext 12 months.

Bellwether: Stocks that are of high importance or relevance to the sector and which the equity sectorstrategist expects the stock to perform broadly in line with the sector benchmark in the next12 months.

*A stock cannot be selected as Most Preferred if UBS Investment Research rates it a Sell, while a UBS Investment ResearchBuy 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, contractualor best business practice obligations which are normally caused by UBS Investment Bank’s involvement in an investmentbanking transaction in regard to the concerned company.

Equity selection: An assessment relative to a benchmarkEquity selections in Equity Preferences lists (EPLs) are relative assessments versus a sector/industry, country/regional orthematic benchmark. The chosen benchmark is disclosed on the front page of each EPL.Stocks can be selected for several EPLs. To keep consistency, a stock can only be selected as either Most Preferred or LeastPreferred, but not both simultaneously. As benchmarks differ between lists, stocks need not be included on every list towhich they could theoretically be added.



Appendix

Disclaimer

In certain countries UBS AG is referred to as UBS SA. This publication is for our clients’ information only and is notintended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. It does notconstitute a personal recommendation or take into account the particular investment objectives, financial situation andneeds of any specific recipient. We recommend that recipients take financial and/or tax advice as to the implicationsof investing in any of the products mentioned herein. We do not provide tax advice. The analysis contained herein isbased on numerous assumptions. Different assumptions could result in materially different results. Other than disclosuresrelating to UBS AG, its subsidiaries and affiliates, all information expressed in this document were obtained from sourcesbelieved to be reliable and in good faith, but no representation or warranty, express or implied, is made as to its accuracyor completeness. All information and opinions are current only as of the date of this report, and are subject to changewithout notice. This publication is not intended to be a complete statement or summary of the securities, markets ordevelopments referred to in the report. Opinions may differ or be contrary to those expressed by other business areasor groups of UBS AG, its subsidiaries and affiliates. Research publications from Chief Investment Office Global WealthManagement (CIO GWM), formerly known as CIO Americas, Wealth Management, are written by UBS Global WealthManagement, a Business Division of UBS AG (UBS) or an affiliate thereof (collectively, UBS). UBS Investment Research iswritten by UBS Investment Bank. Except for economic forecasts, the research process of CIO GWM is independent of UBSInvestment Research. As a consequence research methodologies applied and assumptions made by CIO GWM and UBSInvestment Research may differ, for example, in terms of investment horizon, model assumptions, and valuation methods.Therefore investment recommendations independently provided by the two UBS research organizations can be different.The analyst(s) responsible for the preparation of this report may interact with trading desk personnel, sales personnel andother constituencies for the purpose of gathering, synthesizing and interpreting market information. The compensationof the analyst(s) who prepared this report is determined exclusively by research management and senior management (notincluding investment banking). Analyst compensation is not based on investment banking, sales and trading or principaltrading revenues, however, compensation may relate to the revenues of UBS as a whole, of which investment banking,sales and trading and principal trading are a part.UBS AG, its affiliates, subsidiaries and employees may trade as principal and buy and sell securities identified herein. Atany time, investment decisions (including whether to buy, sell or hold securities) made by UBS and its employees may differfrom or be contrary to the opinions expressed in UBS research publications. Some investments may not be readily realizablesince the market in the securities is illiquid and therefore valuing the investment and identifying the risk to which youare exposed may be difficult to quantify. UBS relies on information barriers to control the flow of information containedin one or more areas within UBS, into other areas, units, groups or affiliates of UBS. Some investments may be subjectto sudden and large falls in value and on realization you may receive back less than you invested or may be requiredto pay more. Changes in foreign currency exchange rates may have an adverse effect on the price, value or income ofan investment. Past performance of an investment is not a guide to its future performance. Additional information willbe made available upon request. This report is for distribution only under such circumstances as may be permitted byapplicable law. The securities described herein may not be eligible for sale in all jurisdictions or to all categories of investors.Distributed to US persons by UBS Financial Services Inc. or UBS Securities LLC, subsidiaries of UBS AG. UBS SwitzerlandAG, UBS Deutschland AG, UBS Bank, S.A., UBS Brasil Administradora de Valores Mobiliarios Ltda, UBS Asesores Mexico,S.A. de C.V., UBS Securities Japan Co., Ltd, UBS Wealth Management Israel Ltd and UBS Menkul Degerler AS are affiliatesof UBS AG. UBS Financial Services Incorporated of PuertoRico is a subsidiary of UBS Financial Services Inc. UBS FinancialServices Inc. accepts responsibility for the content of a report prepared by a non-US affiliate when it distributes reports toUS persons. All transactions by a US person in the securities mentioned in this report should be effected through a US-registered broker dealer affiliated with UBS, and not through a non-US affiliate. The contents of this report have not beenand will not be approved by any securities or investment authority in the United States or elsewhere. UBS Financial ServicesInc. is not acting as a municipal advisor to any municipal entity or obligated person within the meaning of Section 15B ofthe Securities Exchange Act (the "Municipal Advisor Rule") and the opinions or views contained herein are not intendedto be, and do not constitute, advice within the meaning of the Municipal Advisor Rule. Version as per April 2018.

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Kevin Dennean, CFA, Technology Equity Sector Strategist …€¦ · Chief Investment Office Americas, Wealth Management Kevin Dennean, CFA, Technology Equity Sector Strategist Americas,