The state of technology so far

 

So here we are, on the other side of the first week deluge of earnings reports. It's helpful for me to talk about what I'm getting from the reports to see if there's anything thematic developing and to make sure the themes I've previously perceived are actually there.

 

The PC is more recession resistant than people think.

Intel held share, AMD is slipping further away. At Intel, there's not a lot of further slippage since the bar came down.

Broadcom, after a long spell of sub-par performance, has started to show some top line improvement.

Memory prices have picked up of late. Sustainability in DRAM is questionable as these price hikes are driven by how weak business is, not how strong it is. It's a commodity market and it's unlikely will power alone can hold prices up.

The SOX was pricing in far worse results than it's gotten so far.

At 340, many bellwether semis were trading at 10-12* earnings estimates with the justification being the earnings estimates were too high. Estimates have come down but not enough to earn those lower valuations. My experience is that the average semi move is 20%. At 385, we're a little over half-way there. I think they have room to 410 and the index is likely to continue to carry there. The summer is starting to loom. Historically tech sucks in the summer so it better get to 410 quickly.

The semiconductor capital equipment industry is too dependent on memory right now.

That said, capital equipment makers are suffering badly from their dependence on memory. Memory prices have been better since April began but were terrible for the first quarter. Part of the improvement in memory pricing of late is due to capital spending cutbacks by memory manufacturers. This puts the onus squarely on the equipment stocks, which are running far higher than historic dependency on memory for their success. Companies such as Lam Research (LRCX), Varian Semiconductor (VSEA), Mattson Technologies (MTSN) and even mighty Applied Materials (AMAT) have between 50 and 80% of their present business in the memory market. Novellus (NVLS) recently guided to a 25% decline in orders for the coming quarter. Expect to hear that echoed by the industry. Lam Research (LRCX) reports tonight and is likely to reset the order bar severely – it's a short.

The wireless industry is under pressure.

Sub adds have weakened. Subprime problems have caused back-up in the lower end of the US market. Motorola is in shambles. The high end appears to be dominated almost exclusively by Research In Motion (RIMM). Nokia and Ericsson have hit a wall at the high end as Blackberries and iPhones steal all the glory. Texas Instruments took the bar down when they reported but probably not enough. There's still more painful transition going on in this industry that could go on throughout this year.

Digital TVs will enjoy boisterous growth as the FCC analog cutoff date approaches.

There's a lot of capital spending in digital TVs as is evidenced by Photon Dynamics (PHTN) order guidance rising so dramatically. Corning is seeing good glass demand. Applied Materials also saw very strong orders in flat panel display equipment. Optronics (AUO) had good numbers. There's certainly a strong build here. This could get derailed by weak consumer spending habits as we move through the year. It's early to call Christmas but there's certainly room for improvement in terms of sell through.

IT spending has not fallen off a cliff… yet.

There's a pause. Companies seem to be saying business will be back later in the year. They're just pushouts and the business will close next quarter. I think this is completely wrong. Those pushouts are rapidly becoming multiple quarter phenomenon. No IT manager wants to be a hero here. Spending is always watched closely when growth is flagging. The financial industry is incredibly important to overall IT spending and its very likely they'll be pulling their horns in all year in anticipation of budget cuts and a lack of ability to get widescale projects approved in an uncertain environment. I find myself becoming increasingly negative on software stocks. I don't write on the sector much but I should start doing that more often.

 

Ok, enough history. Back to the present.