Yesterday was a big day on the stock markets. The Dow, not a great indicator, was up by 202, on the strength of earnings from IBM and Coca-Cola. (The Dow is price weighted, so stocks with the highest prices have the most impact. IBM trades at $185, by far the most important Dow component).
IBM's big upside earning surprise helped tech rally sharply, with the Nasdaq up over 2% on the day. Among those that saw big rallies were INTC and MSFT, which report today and tomorrow, up 3.5% ahead of earnings. AAPL was also up about 3.5% at the close.
And then AAPL reported. It was, at least from the headline number, a monster quarter, and the stock was quickly up another 17 points (4.5%) on top of the strong gain booked at the close.
While IBM led to a huge surge in other tech stocks, which encouraged optimism on IBM's good results, all other tech stocks dropped in after-hours trading (INTC did recover to book a very small gain).
Now, admittedly, stocks that have good days tend to have weaker performance in after-hours as savvy traders try to book some profits before markets open, so some downward movement might be expected - but against continued strong performance of tech companies, I would expect that strong results in the tech sector would bolster expectations for MSFT and INTC. I believe they will report above average (or "consensus" - a most [intentionally] misused term in earnings jargon).
Apple's success, in other words, did not provide further enthusiasm for stocks of PCs and laptops. No, they saw Apple's sales of tablets and concluded that the PC is dying faster than anyone thinks. I guess this is what everyone believes - that Apple will kill the PC and with it the great franchises in tech.
I should point out that expectations are for INTC to report the same $0.51 per share it reported last year (on a similar number of shares outstanding) and for MSFT to report $0.58 per share - an increase of 7 cents, or nearly 14%. I have to ask how it can be that a stock projected to grow earnings 14% per year with mountains of cash and a tremendous franchise can continue to trade at 10x earnings. What am I missing?
I can accept that INTC and MSFT's franchises may be less valuable going forward than they were in the past. And yet, at MSFT sales and profits continue to rise. MSFT continues to produce the most valuable productivity software in the universe. It may be a laggard in online games (though Xbox is competitive) - but is entertainment really where the big market for tech spending is going to be, or is it just a small market segement currently experiencing rapid growth (and therefore loved by the people who kibbitz markets - investment banks and the like?).
Ditto Intel. They still produce the best chips. Sure, Apple wants to use its own stuff, and it's market share has grown to the point where that may be feasible, so everyone is afraid that Intel's share will drop (which in a high operating leverage environment could hurt profitability). But how many times have we watched AMD go through near death experiences when there is a downturn and it cannot match Intel's cost structure? The fact is, Intel has the know how to build chips for phones, and competitors to Apple have an incentive to work with Intel to avoid ARM and the Apple ecosystem, for fear of feeding the beast. Plus, Intel has the strength to buy it's way into the market, if need be.
The market sees these companies as dead or dying dinosaurs; I always remember that dead dinosaurs are a major source of the energy that powers the world.
In any case, I am looking for earnings beats by MSFT and INTC. Even CSCO may surprise, excluding the costs of restructuring - which in any case may have been booked after the quarter. I am almost starting to think that CSCO could finally revive itself, were it not for the billion shares in phantom equity sitting off balance sheet in the notes.
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