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On my paid site: Buying technology on the coming dip

posted on June 30, 2016 at 8:15 pm

On my paid site JubakAM.com I aim for a mix of posts on macro trends and on individual stock picks. It’s a strategy I call tactical stock picking.

Over the last few days on this free site and on my paid site, I’ve posted my views on the short-term and medium-term effects of the Brexit vote.

Today’s post is about the coming dip in technology, why it will happen, and why it’s a good buy on the dip opportunity.

Brexit and the stronger dollar are likely to produce guidance for the third quarter that’s even more disappointing than the current Wall Street estimate of a 7.2% year over year drop in earnings for the second quarter for the stocks in the Standard & Poor’s 500.

If you look at what sold off during the two day Brexit crisis, you’ll find the expected list in the technology sector–stocks like NXP Semiconductor (NXPI) that are headquartered in Europe–and some unusual candidates such as Facebook (FB). In the case of Facebook the drop seems to be due to short sellers talking up the hit to revenue that Facebook and other technology companies face from a stronger dollar.

I think that leaves the market positioned to focus on the effects of a stronger dollar. Expect to hear about the dollar as headwind in the earnings reports from the big technology companies that report in mid-July: IBM, Microsoft, and Intel.

When you’re looking for bargains in this market do remember that the second quarter is almost always the worst quarter for technology stocks. You’re buying for the recovery in the third and fourth quarter–make sure you believe it’s going to materialize this year.

That’s what I’m working on at my subscription JubakAM.com site. (I’m still, yes still, at work on what’s turned out to be a very complicated post on the robotics sector and on one about water stocks that should go up on JubakAM.com in the next day or two.

I think there’s some value to you in passing on the direction of my thinking about the market on that site. Hope so anyway.

Of course, there’s an ulterior motive to sharing this with you: If you decide that you’d like more of my thoughts on the market in my JubakAM.com posts, I’m hoping that you’ll subscribe to my site at JubakAM.com for $199 a year. (By the way, you can get a full refund during the first seven days if you change your mind for any reason.)


Using tech sector softness to add Qualcomm as a dividend pick

posted on May 5, 2016 at 7:31 pm

Tomorrow I’m adding shares of Qualcomm (QCOM) to my dividend portfolio in an effort to pick up a higher than average yield on the recent general slump in technology shares, and in the shares of companies in the smart phone business in particular.

Qualcomm has been in steady slide since November–when the stock closed at 60.87 on November 3. The high for the last 52 weeks is $71.32. The price at today’s close was $50.92.

That has brought yield on these shares up to 4.18%, above average for even the big old-school technology stocks that have made the transition from growth stocks to value/dividend plays. Intel (INTC), which I also hold in my dividend portfolio, yields 3.43%. Cisco Systems (CSCO) yields 3.87%. Microsoft (MSFT) pays 2.89%.

Qualcomm’s dividend will be paid to shareholders of record on June 22. The ex-dividend date is May 27 and the record date is June 1.

I’ll understand if you want to wait until later in the weak summer quarter for technology stocks before picking this up. Maybe Qualcomm will retreat a bit more and give you a better yield. But the company’s higher than average dividend at a time when yield is hard to find is likely to support the shares in any general sector weakness.

Looking to buy Nvidia but trying to get the timing right

posted on April 25, 2016 at 7:25 pm

I’m going to add shares of Nvidia (NVDA) to my Jubak’s Picks portfolio later this week–as soon as the dust has settled from what is likely to be a disappointing earnings announcement by Apple. (Apple (AAPL) postponed earnings report from today April 25 to tomorrow April 26 so Apple executives could attend the funeral of Bill Campbell, a long-time member of Apple’s board of directors.) Nvidia reports quarterly earnings itself on Thursday, May 5. More thoughts about the timing of this purchase later in this post.

You know Nvidia (NVDA), if you know it at all, as the dominant maker of graphics processors for computer gaming.

That’s one of the few areas of growth in traditional chip markets. It is most recent survey of the markets for chips, Intel (INTC) didn’t find a whole lot of good news to report. PC sales continued to fall in the first quarter and were likely to stay negative for all of 2016. Smartphones, a market that Intel had targeted were showing stagnating sales with 2016 growth looking to be in the single digits. The market for server chips continued to grow but with Intel already owning almost all the market for servers running on PC-style chips, there wasn’t any opportunity to grab market share in that direction.

About the only place that Intel could see room to run was in the market for graphics processors. While the market for PCs was showing negative growth, the market for graphics chips running on platforms that included but weren’t limited to PCs continued to show solid growth. In 2015, Intel noted, the market for high-end Core i7 and unlocked PC enthusiast “K” processors set all all time records for volumes.

Nvidia’s dominance of that market, though, is a kind of two-edged sword. Nvidia has roughly an 80% share of the market for discrete graphics cards for PCs. Which means that not about to grab big share from other players. For growth in this segment Nvidia is pretty much dependent on growth in the market as a whole and on convincing gamers to move up to faster and faster graphics processors. (That’s a GPU as opposed to the CPUs that Intel sells to run PCs and servers and the like.) That’s a challenge but such trends as the increasing complexity and richness of computer games and the introduction of virtual reality technology are flowing in Nvidia’s direction.The company’s GTX 970 graphics card, which sells for $350, is the most popular graphics card on the Steam digital distribution platform for PC gaming. (Steam is the largest digital distribution platform for PC gaming with 125 million active users, according to Valve, Steam’s developer and Gamespot.) Steam has had as many as 12.5 million concurrent users.) And Nvidia’s new Pascal GPU is a beast–65% faster but consuming 70% less power. Gaming isn’t a shabby business for Nvida. Gaming revenue has climbed at a compounded average annual growth rate of 21% over the last five years on 9% CAGR in units.

Okay, that’s the Nvidia you may know. But importantly it’s not the company that emerges from Nvidia’s most recent company presentations.

Here’s the company in fiscal 2013: 42% of revenue came from chips for PCs and mobile devices (the Tegra family of mobile processors): 52% of revenue came from chips for gaming (X-Box, etc.), datacenters, and autos, and 6% from licensing of intellectual property (to Intel, mostly.)

And here’s the company in fiscal 2016 (that’s basically through the end of 2015): PC and mobile revenue are down to 9% of the total, intellectual property is 6%, and the rest, 86%, is all gaming, data centers, and autos.

Consider these compounded annual growth rates over the last 3 years.

Gaming 30%. Datacenter 40%. Auto 80%.

It turns out that the kind of massively parallel architectures that you need to built to handle graphics processing for massively complex multiplayer games where a chip has to handle input from multiple sources and keep an entire visual world updated in real time is well suited to the world of cloud computing and massive real time datacenter processing, and to the real time needs of the driver of an automobile for navigation, automatic braking, lane guidance and all the rest of the new world of automated driving.

Yep, this maker of graphics processing units for gaming finds itself with chips and systems on a chip ideally suited for two of the fastest growing parts of the technology market–cloud computing and automobiles.

And did I mention that these fastest growing parts of Nvidia carry a higher margin that the old bread-and-butter PC graphics processing business. Gross margins at Nvidia have climbed to 56.8% in fiscal 2016 from 52.3% in fiscal 2013. Operating margins in the same period have gone to 22% from 20%.

These two fastest growing parts of Nvidia aren’t yet the biggest parts of Nvidia. In fiscal 2016 the datacenter business produced $339 million in revenue or 6.8% of the total for the company. Automotive revenue was 6.4% of total revenue or 6.4%.

But one of the nice things about Nvidia as a growth stock is that it’s big enough to generate a lot of cash to use in research & development–$1.2 billion in cash flow in fiscal 2016–but the company is small enough so that a fast growing but still small business like datacenter or automotive can make a difference to the bottom and top lines fairly quickly. This isn’t Intel with its $55 billion in 2015 revenue. Nvidia had revenue of $5 billion in fiscal 2016.

Now on to the tough stuff valuation and timing.

Nvidia isn’t cheap.

If you subtract cash,the stock trades at a PE ratio of 27 times trailing 12-month earnings. Nvidia’s multiple on forecast earnings is 19.2 but, of course, that depends on earnings growth coming in as forecast.

Officially Wall Street is looking for the company to report earnings of 31 cents a share for the next quarter. The unofficial whisper number is 34 cents. That’s not a huge enthusiasm indicator but I do worry that if Nvidia merely beats expectations by a few cents a share, traders looking for momentum will be disappointed and sell the shares off.

And that’s the danger. Do you buy now and risk that sell off? Or hold off until after earnings and avoid the risk is a disappointment but take the risk that Nvidia will jump on a surprise?

I’m going to wait a few days to answer that–until I see what Apple reports tomorrow and whether or not those results create some selling in the entire technology sector that might take a little risk out of Nvidia.

But I definitely am looking to buy. There’s not a lot of growth in the market right now and I’m willing to pay up a bit for it.

On my paid site: Looking for the next profit trend in chip stocks and the fuse on China’s bond bombshell gets shorter

posted on April 21, 2016 at 7:56 pm
stocks up

On my paid site JubakAM.com I aim for a mix of posts on macro trends and on individual stock picks. It’s a strategy called tactical stock picking.

This week the I’ve been looking for sector trends and trying to find a stock pick that embodies the currents in the sector. In the weekly Friday Tricks and Trends post exclusive to my subscription site JubakAM.com http://jubakam.com I took a look at how the decline in PC sales had created a scramble among chip makers to find growth, any growth. This is a trend that extends well beyond Intel. The drop in PC growth has led companies to target mobile–only to see that sector slow–and server chips–only to see the competition heat up. In my post today on the paid site I looked at the recent results from Qualcomm and that company’s forecast of a slowdown in the growth rate of smartphone sales to single digits in 2016. I promised that on Friday I’d identify the best profit opportunity in front of chip makers and pick the stock of a company positioned to exploit that opportunity. (I’ll also make that pick on the free JubakPicks.com site and add it to those portfolios. Subscribers, though, will get a lot more detail on why I like this pick.)

On a macro/macro level, last week I looked at the developing crisis in Chinese corporate bonds and the increasing number of defaults in that market. In a post later tonight I’ll look at the case of a government controlled company that has announced that its bond will stop trading. As you might imagine that has sent shock waves through the Chinese bond market.

That’s what I’m working on at my subscription JubakAM.com site. I think there’s some value to you in passing on the direction of my thinking about the market on that site. Hope so anyway.

Of course, there’s an ulterior motive to sharing this with you: If you decide that you’d like more of my thoughts on the market in my JubakAM.com posts, I’m hoping that you’ll subscribe to my site at JubakAM.com for $199 a year. (By the way, you can get a full refund during the first seven days if you change your mind for any reason.)

Lessons from Qualcomm’s earnings debacle for the company, smartphones, and the technology sector

posted on July 24, 2015 at 1:27 am

Let me be honest.

When I recommended selling Qualcomm (QCOM) out of my Jubak’s Picks portfolio on April 2, I wasn’t imagining anything like yesterday’s earnings debacle.

The stock closed at $67.97 on April 2 and I recommended taking profits because valuation looked stressed considering the number of competitors that were putting pressure on margins in Qualcomm’s smartphone chip business. The stock jumped to obey my sell by climbing slightly for the next month or two until it hit $69.86 on June 3. Shares then crept gradually lower until yesterday’s earnings report sent them down to $61.78, a drop of 3.75%.

It’s actually amazing to me that the stock didn’t fall further. For the quarter ended June 30, Qualcomm reported earnings of $1.2 billion, down from $2.2 billion in the year-earlier quarter. Revenue fell 14%. Chip shipments were flat year over year.

And then Qualcomm said things would be worse next quarter, the fourth quarter of Qualcomm’s fiscal year. For the quarter that ends in September Qualcomm projected earnings of 51 cents to 76 cents a share on revenue of $4.7 billion to $5.7 billion. The Wall Street consensus had seen the company earning 95 cents a share on sales of $6.13 billion.

Qualcomm’s quarter and its projections for next quarter highlight a problem across the technology sector. Very few technology companies are making very much money. And those that are can expect to see everybody including my Aunt Tilly chasing them. Qualcomm had averaged better than 20% annual sales growth since 2010 because of its dominance of the market for high-end chips that connect phones to the fastest data networks using the LTE standard. But that dominance has been under attack from companies such as Taiwan’s MediaTek, Korea’s Samsung, Arm Holdings (ARMH), and Intel (INTC). In fact in the first three months of the year Samsung and MediaTek grabbed 19% of the market. The loss of a huge order from Samsung’s smartphone business to Samsung’s chip unit was a major contributor to the end of a 19-quarter string of year over year sales growth at Qualcomm.

I don’t see the dynamic that turned this quarter into such a disappointment for Qualcomm turning around quickly. Qualcomm is predicting rather modest compounded annual growth of mid- to high-single digits in the 3G and 4G-device market over the next five years with average selling price (ASP) of the chips that go into those phones staying flat. That seems optimistic to me given that competition has been driving ASPs lower over the last couple of years, but the view is pessimistic enough to explain why so much of Qualcomm’s reaction to this quarter has focused on cost cutting–$600 million in fiscal 2016 and then an additional $1.1 billion in annual reductions.

The other part of Qualcomm’s response to the challenge of this quarter is to announce that it will be looking to address new markets with management citing networking, mobile computing, Internet of Things, and automotive as adding up to a $10 billion addressable opportunity now with growth to $20 billion by 2020.

I think you can readily see the problem with targeting those opportunities. Lots of competitors are going after the same markets—Cisco and Google (GOOG) in the Internet of Things, for example. Intel is willing to pour billions and then more billions into mobile computing. Apple and Google have both targeted the automotive opportunity.

That doesn’t mean it’s not worth going after these opportunities, but it is important to think about those opportunities in the context of the current pattern in the technology sector of one or two companies dominating a market and collecting all the profits from that market.  Qualcomm cited in its conference call the growing concentration in its own sector. That’s a development that should be familiar to technology investors from the examples of Microsoft (MSFT), Intel, and Cisco Systems (CSCO). According to Qualcomm just two companies—Apple (AAPL) and Samsung account of 85% of the premium smart phone segment. The two companies account for an even bigger percentage of the profits in the smartphone sector: Apple accounts for 92% of profits in the smartphone sector, according to Canaccord Genuity, with Samsung pulling in 15%. The rest of the sector shows a loss—which is how Apple and Samsung can add up to more than 100%.

Looking at these numbers and trends I have to wonder if Qualcomm wouldn’t do a better job for shareholders if it eschewed the short-term solutions being urged on it by activist shareholders and instead concentrated on building an unassailable position in 5G technologies based on its clear lead in 4G technologies. That would produce some short-term pain, undoubtedly, since 5G technology is emerging only slowly. (From a long-term perspective it’s the lag in 5G adoption that accounts for much of Qualcomm’s current disappointment.)

And looking at the Qualcomm story I have to wonder if the pattern of concentrating all the profits in a sector in just a few companies doesn’t go a long way to explaining the number of young technology companies that are concentrating on growing revenue and market share as fast as they can—with the hope that someday that will result in the kind of market dominance that has made Apple such an amazingly profitable company.

Of course, it is a whole lot easier in the current technology market to build a strategy around growing revenue as fast as possible and letting profits take care of themselves somewhere down the road. At least that way a CEO doesn’t flag a profit opportunity and attract lots of competitors.

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