Morgan Stanley evaluates North American IT hardware industry: AI investment optimism hides many risks, these US stocks may present a good "buying opportunity"

At the recent Morgan Stanley 2025 TMT Conference, the bank focused on key issues such as enterprise spending, artificial intelligence (AI) investments, tariffs, and engaged in discussions with several North American IT hardware companies. They concluded that despite facing many challenges, enterprise spending continues to show resilience, and the long-term investment outlook for AI infrastructure remains optimistic. The bank pointed out in a report that while there have been no signs of significant cuts in enterprise hardware spending in the past 30 days, the sustainability of growth in spending for small and medium-sized enterprises is threatened by high uncertainty. However, most enterprises are optimistic about their spending plans for 2025, expecting growth in areas such as cloud computing, storage, and traditional servers, with a particularly strong outlook for the PC and storage sectors. Furthermore, enterprises continue to increase their investments in AI infrastructure. Many industry participants have stated that spending on AI-related infrastructure and components show strong long-term growth potential. Companies such as Dell Technologies, Inc. Class C (DELL.US) and Seagate Technology Holdings PLC (STX.US) have performed well in the AI server and storage sectors. IBM (IBM.US) also mentioned that its AI-related orders had reached $5 billion by the end of 2023, indicating continued investment by enterprises in AI technology. Risk Challenges Tariff risks continue to be a significant challenge faced by the industry. While most hardware companies are diversifying their supply chains and increasing prices to cope, the tariff situation remains complex and its impact on enterprise spending plans cannot be ignored. In terms of exposure to the federal government business, although overall risks are relatively limited, short-term spending risks still exist. On the consumer front, the outlook for spending on electronic products is not optimistic, especially in the PC market. Dell Technologies, Inc. Class C and HP Inc. (HPQ.US) both stated that the consumer PC market is still under pricing pressure, and the anticipated surge in device upgrades post-COVID-19 has yet to materialize on a large scale. Faced with these challenges, actively promoting cost efficiency plans has become the core strategy for many hardware companies. Enterprises are taking measures such as using AI tools internally to increase productivity and optimize cost structures to achieve operational leverage and profit growth. Watchlist Morgan Stanley stated that due to various factors, over 50% of IT hardware stocks have entered a correction range since February 19, with average PE ratios compressed by over 2 times. Based on discussions at the TMT Conference and current valuations, Morgan Stanley has listed a "watchlist" of stocks that are increasingly worth watching. These include: - Seagate Technology Holdings PLC ("Overweight" rating, listed as top pick): The company's management is confident in the growth prospects for 2025, reiterating strong and sustained customer demand. They anticipate revenue, profit margins, earnings per share, and free cash flow to see sequential growth. - Dell Technologies, Inc. Class C ("Overweight" rating): Morgan Stanley believes that the low gross margin for AI servers is already reflected in the stock price, and the prospects for the storage business and efficiency improvements are underrated by the market. They expect accelerated growth in revenue, earnings per share, and free cash flow by 2026. - Kornit Digital (KRNT.US, "Overweight" rating): The bank noted that the stock price has dropped significantly, with the PE ratio compressing by 10 times in less than a month, currently at a price-to-sales ratio of only 2 times, with over 50% of the company's market value in cash. - CDW (CDW.US, "Neutral" rating): The stock valuation is currently at historical lows, and the company's management has reassured investors that the most concerning risk of federal government spending is manageable in the current environment. - Teradata Corporation (TDC.US, "Neutral" rating): Despite lackluster revenue growth, the company expects to resume Annual Recurring Revenue (ARR) growth by 2025, with a high free cash flow yield. - Sonos, Inc. (SONO.US, "Underweight" rating): Morgan Stanley stated that consumer spending background and customer acceptance remain concerning issues, but the stock price increasingly reflects these factors. Management's focus on cost efficiency may help protect the company's profits.