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Friday, January 18, 2008

STX Q4:2007 Results

This stock trades at 8* estimates. They beat. Revenue was guided lower but EPS were guided higher on better gross margin guidance.

The hard drive business is unquestionably under a lot of pressure but for the time being the cost advantage in mass storage trumps the portability and durability aspects of NAND flash in terms of the replacement cycle. There will be gradual erosion of this cost advantage over the next couple of years. The gaming cycle is still strong, the DVR cycle is strong. Video eats up a lot of hard drive space.

It’s hard to make a case that Seagate is going to shrink by 20% over the next year, which is what the multiple is telling you. This stock belongs at $25, not here.

IBM Q4:2007 Results

IBM services revenue came in substantially better than the consensus. Even more impressively, bookings came in at 15 billion, some 20% better than the consensus estimate, driven by short-term bookings strength. Much of the upside to consensus EPS assumptions is coming from pension cost savings.

There’s a longer-term trend towards outsourcing of IT functions and IBM with their size and breadth is a prime beneficiary. The bulge in short-term contracts suggests corporate uncertainty – customers have likely been delaying implementing service contracts and are reluctant to be locked in. IT budgets are still holding firm despite the macro-economic environment. IT has become a real productivity tool over the last few years, particularly with the advent of always-on employees via internet connectivity. Customers will replace less hardware and software and milk their existing infrastructure more in an uncertain environment. Nonetheless, I’m surprised services blew out expectations like that.

IBM is a defensive stock. It tends to trade between 10 and 20 times earnings expectations. With the stock trading at ~13* earnings and the economy looking so iffy, it’s a long. Investors will hide there.

AMD Q4:2007 Results

AMD beat revenue estimates slightly with slightly better margins, cost controls and a tax benefit leading to upside versus the consensus estimate. They guided Q1 revenue to normal seasonality which would be down 7%. Capex will be front-loaded for 2008 as AMD continues to ramp capacity.

Estimates are coming down slightly but this stock is seriously compressed. Intel has been performing very well and keeping AMD on the defensive. I would expect that perception to continue but I can’t tell you the stock is a sale here. They’re the number 2 player in the processor market and number 3 is very far behind. Ultimately, AMD is likely to wind up as part of a larger entity. There have been rumors of strategic investors circling the company. That said, Intel is so well capitalized and downright powerful that I don’t see AMD making any kind of big breakthroughs market-share wise. I don’t really have a strong opinion on the stock one way or the other. Under $6 I like it. At $9 I don’t.

Thursday, January 17, 2008

Earnings tonight: AMD, IBM, STX, XLNX

Digital TV is the driver

The FCC mandate dictates that all broadcasters have to clear the analog broadcast frequencies by the end of next year. There’s still roughly 70 million analog televisions out there in regular service. Sure, some of these people will opt for the $40 converter… but quite a few will also opt to trade up. Prices of flat screen high def televisions are getting much closer to price parity with tube TVs. It’s one of the few areas of the consumer electronic economy that can see more than mediocre growth for the next couple of years.

Corning, the largest producer of TV glass, makes a lot of sense to me. TV units are going to continue to move at a rapid pace. There’s an ongoing fiber rollout at telco operators (ok, Verizon) to drive television services to wireline customers. Corning is positioned very strongly in both areas.

I also like a smaller cap name, Photon Dynamics, which makes flat panel display testing equipment – there’s been extensive product retooling under direction of an ex Applied Materials exec. They’ve been cutting costs aggressively and will start to make money imminently. Photon Dynamics also has a potentially undervalued camera sensor subsidiary, Salvador Imaging. Admittedly, they don’t seem to excel at filing financials.

Digital downloads are in their infancy. I have to like Akamai on a thematic basis -- it’s a content delivery play. I also like Digital River, which is the software distribution equivalent. Every day it seems another large media company succumbs to digital delivery. Just this week Apple rolled out on demand video rentals from most of the major studios. Amazon has been doing it a while now. Netflix removed restrictions on customers watching their on demand library of 6,000 films. It’s happening. It’s just a matter of time.

There is a product gap in the market place – people need a doohickey that plugs into the TV and passes along video from their computer. I don’t mean a set top box. I don’t mean a media center server. I don’t mean iTunes inhibited AppleTV. A doohickey. An a/b switch for your TV. $50. Kicks out 802.11n broadcasted video into your TV. That’s it. Hopefully that’ll be the Slingcatcher (due in 2Q08 according to the Slingmedia [owned by Echostar] rep I spoke to at CES last week). A product like that could easily force a tipping point.

Wednesday, January 16, 2008

Intel Q4:2007 results

Intel reported in-line revenue and earnings and guided 300 million below analyst consensus of 10 billion for next quarter. The stock came unglued after hours, trading down over 10%.

When pressed on the conference call, the company was adamant that they were not seeing double ordering, that the weakness was not in the processor or motherboard business. They saw no pronounced weakness in the consumer PC business. They blamed the weakness on flash memory, both NAND and NOR. As Micron is their co-producer of NAND, it should come as no shock that after Micron’s lackluster results some weakness would have passed through to Intel. NOR is and always has been a fab filler business. Intel was hoping to dump their NOR assets into an STM joint venture but that’s taking much longer than expected. Gross margins were better than expected and guided higher than consensus but it was not enough to offset the lower revenue guidance in terms of profits. Consensus earnings estimates are coming down to roughly $1.40 for 2008. This reduction plus the 10% decline pre-opening decline puts Intel at roughly 14* earnings estimates, it’s multiple is twice its forecasted growth rate… still expensive relative to the growth but cheap relative to its historical valuation. Corporate profits in general are under pressure and that tends to lead to IT spending reductions – we could certainly see PC upgrades slow and it doesn’t appear that Intel is forecasting a slowdown in the economy into their guidance, so that tempers my enthusiasm for the shares.

NAND pricing has been terrible all quarter, and finished near the lows. Ultimately NAND weakness is a good thing for the portability portent. NAND is non-mechanical high capacity memory. It’s small, light, requires little power and because its non-mechanical its equipment failure rate is lower than traditional head-based hard drives. NAND represents an enormous threat to the classical hard drive businesses of Seagate and Western Digital in that the cheaper it gets, the more it emphasizes the short-comings of mechanical drives. Once you get 80gb NAND drives for under $100, the traditional hard drive business will begin to erode rapidly.

Typically, “the news” in Intel often represents a near-term reversal for the semiconductor index. If there’s other companies you’re looking to buy, this morning might be a good entry point. I would buy some Apple personally.

Macworld 2008

Apple yesterday unveiled a series of updates to their existing product line.

iPhone: They added maps with creepy location sensing. Google will triangulate your position by reading the last cell towers you’ve used. This could be useful for reconstructing the prior evening’s debauchery for you blackout drunks. They’ve added a customized home screen. You can text message multiple people at once – a wireless provider data charge bonanza. The iPod function receives lyrics and video will have chapters, subtitles and language support. They’ve sold 4 million of iPhones so far and they claim they took 19.5% share of the smartphone market in 4Q07, half of the 39% share they attribute to Research In Motion’s Blackberry. The iPhone developers kit will be ready in late February – until then, suck mediocre apps.

I had one of these things for a few days and my advice to you is wait for the 3G version later in the year (the edge data crawls) and make an appointment for finger-size reduction surgery ASAP so you can use the keyboard.

iTouch: Email for your iTouch. I can’t think of a more useless function for a device that has no connectivity to the internet without passing through a computer. [ed note: the iTouch has wifi. oops. -rh 1/18/07] It also gets maps, lyrics and video chapter, subtitle and language support.

Time Capsule: Basically a wifi hard drive. This is a smart product for them to offer. Networked storage is intimidating to consumers and the Apple name makes the category much friendlier. It’s priced reasonably at $299 for 500mb and $499 for 1tb of storage.

AppleTV: No longer requires a computer to run – it’s really a set top box with iTunes restricted content. Download movie rentals for $2.99 - $4.99 that expire 24 hours after you start playing them. You can move the film to your iPod or iPhone to bring it with you, watch it on TV or on your computer. The 30 day lag between release of the video and appearance on iTunes defeats a lot of the advantage of being able to pull it up on demand. The content providers probably didn’t want to create an environment where they wouldn’t be able to sell a zillion copies of the DVD on release into the channel – that’s how big a threat digital distribution is. It’s going to eliminate countless jobs in the old world economy – delivery men, packagers, professional DVD distributors, DVD fabricators. It will reduce revenue in store bought media substantially, though profit margins should go up quite a bit for the large media companies once they get around to embracing the change.

Macbook Air: Thin, light, sexy. Full sized keyboard, 13 inch display. It’s an impressive design.

Apple stock responded by taking a wicked nose dive – no 3G iPhone and post-Macworld hangover would be my explanation. I like the stock and expect them to trounce analyst expectations this quarter on the back of iPhone and notebook strength. I worry a little about the iPod line as the new nano looks like a stunted version of a real iPod. Apple stores were mobbed all through December.

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