As the world moves towards more data-reliant technologies such as artificial intelligence and internet of things, there are some companies which will weather the resulting disruption to supply chains more than others, Morgan Stanley said in a note.
This shift to what Morgan Stanley called the "data era" may hurt companies that have so far been dependent on revenue from smartphones and personal computers, the firm said.
The investment bank picked out two stocks that could survive best in this transition, as compared with their regional peers: Taiwan's Foxconn — the largest Apple manufacturing partner, as well as Japan's Murata Manufacturing. Both are rated overweight, or an indication that the bank expects a stock or index to outperform its peers. The third is Broadcom, which it rated equal weight.
"We expect a return to enterprise-level innovation after nearly two decades of underinvestment in technology, which will shake up the current technology leadership that's more focused on consumer mobile engagement," Morgan Stanley wrote in a report this week.
The bank said there could be a disruption to supply chains with the move to more data-driven technologies. "For the supply chain, the disruption could be more severe given both high dependence on PC and smartphone sales and the need to diversify manufacturing in the face of tariffs," it wrote. It was referring to the U.S.-China tariff war, which has caused companies to diversify their supply chains.
Morgan Stanley pointed out that personal computers and smartphones account for about 40% of revenue for the world's top ten component suppliers. For Chinese companies, that dependence on such revenue is higher — at about 55%.
"The most challenged suppliers are too exposed to the smartphone and/or PC market, aren't investing enough in new markets, and tend not to have pricing power," it says in the report.
It flagged two stocks which might not fare well, as compared with their regional peers: Japan's Nissha and China's Visionox Technology. Both are rated underweight, or an indication that the bank expects a stock to underperform its peers.
Foxconn Industrial Internet: The Taiwanese giant, Apple's largest manufacturing partner, has "solid exposure" to networking devices and cloud computing equipment, and "superior expertise in manufacturing," Morgan Stanley said. The bank said that will enable Foxconn to build industrial internet platforms, especially in China.
Murata: The Japanese manufacturer is likely to see "substantial profit growth," said Morgan Stanley, explaining its electronic components are "highly competitive" in not just smartphone applications, but also for equipment in areas such as internet of things.
Broadcom: The American chipmaker and major Apple supplier has leading intellectual property which results in "favorable pricing and margins," Morgan Stanley said, which can be reinvested into research and development to "diversify into more products over time."
Other top ranked companies by region
Nissha: The Japanese manufacturer's earnings are "significantly exposed to smartphone touch sensors," but has few products that can tap into the data era, Morgan Stanley said. Furthermore, the investment bank said sales of such sensors may soon decline as the technology is set to be built directly into organic light-emitting diode screens (OLED) starting next year.
Visionox Technology: The Chinese company, which specializes in OLED panels, faces increased competition and high capital expenditure for production capacity, Morgan Stanley said, saying that will drive "profit volatility."
Other bottom-ranked companies by region