Intel’s earnings should be enough to keep the technology rally rolling
After the market close on October 13, Intel (INTC) reported earnings that beat Wall Street estimates and–this is what’s really important this quarter if the rally is to keep going–raised its guidance for fourth quarter revenue to a top of the range $10.5 billion. That’s a full $1 billion above Wall Street estimates.
That set the stock soaring by almost 7% in after-hours trading. The entire chip sector moved up on the news.
The technology-heavy NASDAQ Composite Index is up 36% in 2009, outstripping the performance of the Standard & Poor’s 500 and the Dow Jones Industrial Average by two to one. This news should keep that out performance going.
Two other technology bellwethers Google (GOOG) and IBM (IBM) report on October 15. Texas Instruments (TXN) reports on October 19 and Microsoft (MSFT) on October 23.
Intel actually went so far as to contradict the consensus view that the personal computer industry wouldn’t grow in 2009. Read more
Tech stocks to lead earnings season again?
It’s early yet in earnings season, but I were a gambling man, I’d give the technology sector odds on leading the stock market again this quarter.
Wall Street is beating the bushes for earnings growth right now. If earnings don’t go up in the next quarter or two, stocks won’t be able to continue the rally that began in March.
Anbd where’s the growth going to come from? Financials are kind of iffy. Bank accounting is going to be an unprdictable mess this quarter what with write ups for rallies in toxic assets, and write downs for the rising price of banks’ own debt (yes, that counts as a loss for accounting purposes), commercial real estate loans and credit card debt.
Commodities and materials stocks will do well if the dollar keeps stumbling and if China looks like its still buying, but these cyclicals are starting to seem pricy.
Nope, for good ol’ fashioned earnings power right now, it’s hard to beat technology stocks.
And Wall Street analysts are determined that investors won’t forget it.
On Friday, October 9, Barclays upgraded IBM (IBM) as part of an upgrade of the whole computer hardwar sector. IBM climbed almost 3% on the day and Hewlet-Packard (HPQ) moved up 2%. Inel (INTC) and fellow chip-maker Texas Instruments (TXN) rose 1.5% and 5%, respectively.
Even Qualcomm (QCOM), which has lagged the sector,climbed 0.6%.
Credit Suisse boosted its target price for Google (GOOG) and that stock inched ahead 0.4%. Maybe it’s harder to move a $500 a share stock or maybe investors rightly see Google as company driven by consumer spending and advertising and they still have doubts about the consumer’s willingness to spend.
(Full disclosure: I own shares of Qualcomm.
Now, the chip wars get nasty; expect the survivors to go after the solar cell makers
Chip makers are packing more circuits onto their chips. The next generation will be dense with circuits just 28 billionths of a meter–28 nanometers–wide.
That will expand, yet again, the power and speed of semiconductors, and increase yet again the number of places where chips can be used. The smaller and more powerful chips will wind up adding smarts to yet more “dumb” devices and making already smart devices from cell phones to refrigerators to cars even smarter.
For the chip industry as a whole that means, once the current recession is over, more chip sales, more chip revenues, and more chip profits.
There’s just one tiny problem. Because the factories that make this generation of chips cost so much–a new 28-nanometer chip factory (called a foundry) now being built in upstate New York will cost $4.2 billion–almost no company can afford to build one.
Intel (INTC) figures that only chip companies with at least $9 billion in revenue will be able to afford the next generation of factories. That’s a very short list: Intel, of course, Samsung, Toshiba, Texas Instruments (TXN), and STMicroelectronics (STM). Add in chip Taiwan Semiconductor Manufacturing (TSM), a contract foundary that makes chips for companies without factories. That’s the total: 6 companies in the world.
The drop to six, if Intel’s forecast is correct, just continues a decades long winnowing process that has reduced the number of serious players from 14 when circuits were 90 nanometers wide to nine at the current 45 nanometer levels. Only Intel and Samsung have firm plans to build 22 nanometer factories, the next step downward in size from 28 nanometers.
You can expect the remaining players in the semiconductor game of musical chairs to fight like a passel of six-year olds for each remaining seat. That battle will define winners and losers in the chip sector, of course, but it will also shake up sectors as diverse as solar energy and automobiles. Read more
Buy Qualcomm QCOM
Buy Qualcomm (QCOM). In the current stock market and economy you want to own stocks in the sectors of the market that are outperforming rather than lagging and you want to own companies that can grow even when the economy isn’t. I think cell phone chip-maker Qualcomm fits the bill on both accounts.
First, technology has been one of the strongest sectors this year. Witness the 16% return for the technology-heavy NASDAQ Composite Index in the first six months of 2009 versus the 1.8% gain for the Standard & Poor’s 500 stock index. Qualcomm shares have done even better, climbing 27% from the beginning of the year through June 30. In a market like this you want to buy relative strength. (The shares have dipped about 10% in the current correction creating a decent buying opportunity.)
Second, Qualcomm has recently raised estimates for the fiscal year that ends in September 2009 and looks likely to outgrow both the U.S. and the global economy over the next 12 to 18 months. With next generation 3G wireless phone systems rolling out around the world, Qualcomm’s handset volume is projected to climb by 10% in the June quarter from that same quarter in 2008. A lot of that growth is coming from the world’s emerging economies—in Brazil, for example, the shift to 3G smart phones is just gaining momentum. Networks built on 3G technology use some flavor of the CDMA standard where Qualcomm’s patent position is strongest. The current market leading GSM standard now controls about 60% of the market so Qualcomm will see its global market share grow as the rollout of 3G technology moves market share toward CDMA.
That should make up for any slowdown in the U.S. market. Thanks to its patents Qualcomm collects a royalty on phones sold by Motorola, LG, Samsung, and other companies. Royalties and license feels make up about 40% of company revenues and come with an operating profit margin of near 90%. The other 60% of the company’s revenue comes from its chip-making business. Most of those chips go into the wireless phone sector but Qualcomm is also moving into a new business. Its chips, built on the low-energy platform from ARM Holdings (ARMH), are on the march from cell phones to smart phones to net book computers, where they look like a winner against Intel’s (INTC) current generation of low-power Atom chips. That’s a whole new growth business for Qualcomm. The company is set to report earnings on July 22. As of July 15, I’m adding these shares to Jubak’s Picks with a target price of $55 by March 2010. (Full disclosure: I own shares of Qualcomm in my personal portfolio. I will be adding more three days after this note is posted. As is the rule for Jubak’s Picks, I won’t sell my personal position until three days after I’ve posted a sell on this blog.)
