For computer parts companies, 2015 was feast or famine.
Take a look at the five best-performing technology stocks in the S&P 500 this year through Monday. And check out the bottom rung of tech performers in the index. Each of the three worst tech companies makes computer innards such as chips or disk drives. Among the best stocks of 2015 is Nvidia, also a chip company. What gives?
The laggards -- and oddly, the chip champion -- have in common a reliance on parts of the computing market that are shrinking or buffeted by substantial price competition. And a lesson from the losers in the computing component business -- where chip mergers hit a peak this year -- is that consolidation doesn’t necessarily solve companies' ills, at least not for long.
First, a few words in appropriately hushed tones about Micron, which is moored at the ugly end of the S&P 500 with a gaggle of energy stocks. The company, which is reporting earnings Tuesday, makes memory chips that are crucial components in personal computers and smartphones. The trouble is that sales of PCs have been falling for four consecutive years. The pace of smartphone sales has slowed way, way down and is expected to end 2015 with barely 10 percent more units sold than a year ago, according to research firm IDC. Those dynamics aren’t good for Micron, nor is competing with industry giant Samsung, which makes a slew of chips and is helping drive down prices.
Seagate and Western Digital make hard drives that store digital information in personal computers and inside of the huge computing data centers run by big companies and Internet giants such as Google. The PC decline hurts Seagate and Western Digital, as has a preference for a different technology for data storage on “flash” memory chips, which are the same type used in the iPhone. Western Digital shares were also punished over a pricey deal the company struck to buy Sandisk and break into the market for flash storage chips.
This year was an unfortunate reversal of fortunate for Seagate and Western Digital, which had emerged as big winners in the last great consolidation wave in the computer component business. The companies’ shares did well the last couple of years after they gobbled up rivals and essentially had the hard-drive market all to themselves. But changing technology winds caught up with them, and the companies were left flat-footed by the industry shift away from their strong suits in traditional disk drives.
Let Seagate and Western Digital serve as a reminder to would-be consolidators everywhere: Scale matters, until you're the biggest player in a shrinking market. The reminder is newly relevant for chip companies where companies including Broadcom and Avago have an urge to merge because there are fewer smartphone makers to buy components.
Reliance on a declining part of the computer industry isn’t a death knell, though, as the big chip winner of the year shows. Nvidia is heavily tied to the PC industry too, but fanatics about video games still want powerful home computers with souped-up graphics that Nvidia’s computer chips help enable. It also helped that Nvidia's biggest rival in the market for graphics chips, AMD, has been a walking disaster.
The good news for the computer component losers of 2015 is that they're in an industry with notorious swings between feast and famine periods. And at least they’re not doing as badly as Toshiba.
The lessons from the S&P standouts, then, is to park in a profitable niche if you're one of the few holdouts in a unpromising market. And beware the ephemeral benefits of dealmaking.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Tech companies accounted for four of the five best-performing stocks in the S&P 500 so far this year, according to Bloomberg data. Hormel Foods was the non-tech entrant at No. 5.
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