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Friday, June 27, 2008

Micron (MU) pretty much in line, cuts capex

Micron reported. It was pretty much in line with expectations -- and the stock drops 10% anyway on NAND pricing concerns. Micron stated they believe chip dealers (yes, there is such a thing) are too long NAND and that inventory in the channel needs to come down and retail demand needs to pick up for there to be some kind of equilibrium in the market. DRAM was about on plan though their specialty DRAM business makes their sensitivity to pricing less significant and some may have looked for a bigger benefit. NAND units were up 40% with pricing down 20%.

They introduced a capex plan for 09 and its a doozy. They're saying they're going to spend $2.5 - $3.0 bil this year and 1.5 - 2.0 bil next. Sucks to be on the receiving end of that forecast if you're a semicap. Yet another reason to be negative on memory-heavy capex companies like LRCX, VSEA and MTSN.

Apple (AAPL) jiggles the supply chain, undulations follow

Citi says Samsung saw a large order cancellation from a major OEM in NAND -- pretty sure it's Apple in iPods. Yesterday there was a lot of talk about increased build plans on the iPhone in the channel, stirred up by a note from FBR.

iPods are still a pretty substantial portion of the mix. I would think ramping iPhones and ramping down iPods makes sense -- there's going to be cannibalization from the $199 (or free if you're in parts of Europe) iPhone. Apple looks like its going to $156 near-term.

Thursday, June 26, 2008

Sandisk (SNDK) in the perfect storm

So I've hated Sandisk for a long time. Last quarter I said the stock belonged in the low 20s. It ran up to $33 instead on the notion that the co was being overly cautious and that Q2 would be the bottom for prod gross margins.

I'm a lot less negative on the stock at $20.

Right now you've got NAND contract down 25%, retail pricing terrible, the stock is clearly telegraphing they're going to miss estimates. Doesn't get a lot worse from a story perspective. I think the quarter is probably a miserable mess... but they kind of told us that would happen... and they've been saying all quarter that pricing isnt good, that retail is weaker.

It may still go lower but I'm wondering if the story is bad enough that it can get better from here.

Google (GOOG) could have a similar issue

Google's been talking about a lot of capital spending and higher opex putting pressure on margins since... well... forever. They were all talk until the last quarter, where it actually started to show up. Comscore's horrific data all through the March quarter led people to believe a miss was coming... so when they made numbers, the stock exploded higher. The fact is, though, Google mostly got there because of the currency translation benefits of their international business. My piece on their last quarter is worth re-reading.

The issues they had last quarter are likely to persist this quarter... the difference here is one of expectations. People were looking for RIMM to beat and raise guidance, so the stock got crushed on the margin shortfalls. People were looking for Google to miss so the stock exploded higher. I don't think people are looking for Google to miss anymore... and there were some alarming trends beginning last quarter. And when you get big like Google is getting, it's pretty tough to about face. Rising spending is likely to be an ongoing fact of life for them... and for shareholders.

I kind of imagine a conversation like this happening somewhere at the midday mutual fund research meeting today:

"What other stocks do we own that have very high growth rates and could be heading for a margin shortfall due to higher spending?"
"(gulp) Er I guess that could happen at Google too."
"Right. Start selling Google."

I'm short some.

Orbatech (ORBK) buying Photon Dynamics (PHTN) for $15.60 a share cash

I said this would go to $15 (like 3 times). I kinda thought it would be on the fundamentals... but I'll take it.

Research In Motion (RIMM) aftermath

Gross margins light, opex much higher than expectations. Spending to continue for the foreseeable future. Midpoint of guidance indicates a moderation in the y/y growth rate -- but they've been growing at over 100% for the last several quarters... some slowdown was expected.

The timetable shift in the Bold is a potential problem in that RIMM relies on new product introductions to drive new unit shipments into the channel. Any substantial product delays will hamper their progress. I believe carriers that are not iPhone sellers are likely to heavily subsidize Blackberries to get at those high end wireless data users they need to bulk up their subscriber bases. I think that will drive substantial units over the next year.

The stock trades at a decent discount to its growth prospects already. Around $120 is the first place I'm going to look to restart a position... and I do think it will trade there near-term. It's a spot on the chart, frankly. It will equate to roughly 30* this year's estimate and 25 times next year's. I think that's fair.

Expectations were for a raise. Analysts were foaming at the bit on this last week. There's a lot of 'splainin to do.

Wednesday, June 25, 2008

Research In Motion (RIMM) 1Q:2009 results

Stock down a quick 15 on the earnings. Yikes.

They missed current quarter estimates by a touch and EPS by a penny. Next quarter, they guide better than consensus and about in-line with recently revised revenue estimates. The EPS guidance, however, is as much as nickel below the street.

Subscribers come in at 2.3mm, which is a little bit below some of the recent #s I've seen. Shipments of 5.4mm is roughly in line.

Down 15 seems extreme and I'm tempted to start buying it here but I figure a lot of traders are caught in the name because of all the reiterations going into the number. I'm bidding $120 to buy some, hoping it gets sloppy. I think 131 is a fake support level near-term. It's going to need to spill more than that.

If RIMM trades to 120 its a great opportunity to get in on the preeminent smartphone franchise.

NAND contract prices collapse

Contract prices have dropped double digit percentages for 2H June. The 8gb contract dropped 25%. I think that's bad for the semicaps -- NAND is still a big percentage of business. All the memory cuts have been on the DRAM side. If there's going to be cutting on the NAND side too there will be another leg down in their orders and their Q4 recovery story will fade quickly.



Fed, unsure what to do, does nothing

The Fed, awash in cross purpose catalysts of higher inflation and slower growth opts to sit on its hands. Honestly, I wish I could do that more often when I don't know what to do.

There have been a number of floated stories in the press about the financing window for non-member institutions being a temporary condition... about the "moral hazard" involved in leaving that window open. I'm relieved they know that. I hope it actually fixed something. The fact of the matter is that it created a lot of liquidity. As the added liquidity was provided in an effort to unfreeze the capital markets and let banks not pull in their horns completely, by cutting it off they'll be effectively removing that same liquidity. The stealth ease will be accompanied by a stealth tightening. I hope.

Their language is decidedly straddled.

"Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased."

Thanks, bye.

Tech overview

I had an interview yesterday and the guy had asked me to write up a tech overview. Here you go.

The PC market overall is relatively okay. Desktop is weak – Gartner reported a couple of weeks ago that desktop is down 2% y/y. Notebooks continue to gain share in the market. Most OEMs have benefitted from a weaker dollar and strength in emerging markets. Though the dollar euro remains somewhat constant, the dollar yen has backed up appreciably this quarter. DRAM prices have been going up all quarter, mostly due to capacity cutbacks by ailing manufacturers who have been increasingly shifting their capacity to NAND as the growth dynamics in NAND are more favorable. I think the consumer is the driver for the second half of the year and despite $5 gas, despite a mortgage market freeze, despite what ought to be a pretty lousy job market, consumer spending on PCs continues to be pretty good. I suspect guidance in general from component manufacturers will be in line with consensus, if not a little stronger. I’m worried about summer seasonality and tech stocks. I think, however, the PC market is far more resilient to a consumer slowdown than it has been in years past simply because replacement cycles are somewhat inevitable and internet access has become a service as irreplaceable as the telephone or the television. So I think there’s room for some upside surprise later in the year.

Last quarter, Dell had a good number that surprised the street. They filled the retail channel with product (last year they didn’t have a retail channel) and currency helped them greatly. Backing out the currency gain from the quarter, I think revenues were essentially in line with consensus. I’m not a fan of currency beats. I think Dell has been great at layering on additional product lines like storage and printers but the last one they tried – digital TV – flopped… and they don’t seem to have a new revenue stream in the works. They’ve suggested they’re going to expand their services offerings – instead I see HPQ doing a much better job of it. Dell seems to me like a glorified marketing company. A great marketing company, no doubt… but nothing I’m excited about without some kind of clear change catalyst. I don’t really like Dell.

Apple is gaining a lot of share in the PC market – there will be upside from Macs for the quarter. iPods are running slightly above street consensus, though I suspect the upside variance is likely to moderate now that the iPhone is priced so close to the existing iPod line. The iPhone current quarter sucked but Apple made a wise business decision not to sell people a $400 phone they’d be clamoring for a refund on a month later. Gross margin guidance was very conservative. Last quarter, Apple was working off high priced NAND they had bought in the December quarter. Apple literally did not buy a stitch of NAND for all of the March quarter. They took Samsung and Hynix out of a sizeable chunk of inventory at the beginning of April and will realize a benefit from that this quarter. Also, Macs are overpriced relative to all other notebooks and since the transition to Intel-based systems have the same COGS as the competition. As such, I expect an upside surprise to margins and I expect Apple to continue to gain share as the internet does not require Windows and that’s what most consumers (the majority of their market) use computers to do. The September and December quarter are seasonally strong for the company – back to school is a big driver as is the holiday selling season. The biggest risk appears to be the health of Steve Jobs. I like Apple.

Research In Motion has been a stock I’ve been recommending since February. I have attached a series of blog entries on it. My thesis is that smartphone adoption is a very small part of the market right now – RIMM has roughly 4% domestic share and approximately 1% in Europe. Carriers are poised on the brink of a price war – again. Carriers can charge a premium for smartphone data usage. The iPhone subsidies that bring the phone’s cost down are repaid on the back-end through higher data charges. As only a select list of carriers have the iPhone, it is likely the competition will have to play their best hand(set) which is the Blackberry line. I expect carriers to heavily subsidize Blackberries to compete with the iPhone which will drive penetration rates significantly higher. Over the next several years, I expect smartphone usage to continue to be the big share gain category in cell phones and I expect Research In Motion to be the prime beneficiary of this trend.

Research In Motion has increasingly become a product introduction story – when they intro a new model, they fill the channel with it in almost a staggered but deliberate way, selling each individual model to a short list of carriers that increases over time. Planned for this year are the Verizon “Thunder” (a touch screen model), “Niagra” (an EVDO 9000 series slated for Verizon in May 2009), “Kickstart” (a flip phone, expected in the next 6 months), and “Javelin” (a 3G-less 9000 series). As long as they don’t blow the product timetable, they’ll have an opportunity to seed the channel for the next year. I like Research In Motion. I do however think there is some event risk in front of the quarter as too many others seem to like it right now also – 5 sell side analysts pushed it hard last week – I also noticed that a series of insiders sold into the crest of that reiteration wave. I am not intimate enough with the nuances of the expectations here to say buy it in front of the quarter – I would deem that event risk and try to protect the position accordingly.

Motorola is in serious trouble from all indications from the supply chain. Build rates have sunk to very low levels and have not recovered – their baseline business is just plain lower now. The handset line is perceived as undifferentiated. Their smartphone offering stinks. They seem to be flirting with idea insolvency and I see nothing to turn it right now.

I have been pretty negative on the semicaps for the last year. Memory is a historical record percentage of business (80% at LRCX, 50% at AMAT for example) and the memory business has been decidedly unhealthy. At present demand on a unit basis has remained good and is offsetting the oversupply conditions. A series of DRAM manufacturers cutback their spending and since then the DRAM market seems somewhat more healthy but I fear its misleading. NAND prices are becoming increasingly worse as the cutbacks happened on the DRAM side but stayed relatively constant on NAND. I suspect there will be another leg of downward revisions as we move into the second half and the weight of a heavy retail inventory environment in NAND drags pricing down further. Lam has been indicating they expect an upturn in the fourth quarter. I like Lam on a valuation basis but I think they’re probably wrong about the upturn as NAND has yet to see cutbacks. I like the “story” in Applied Materials, specifically the solar expansion, but the economics of that business for them has yet to be proven and I think it’s become a very generic play for portfolio managers to be long Applied Materials and short others in the group. I can’t really recommend buying any of them.

The hard drive business is interesting to me in that the stocks trade at 6-7* earnings estimates. I am long Seagate and short Western Digital, mostly due to historical disparity between the two – the price differential between them has never been greater. I think Seagate is likely to miss the quarter, partially based on the action in the stock, but I think people selling it at 6* earnings are putting too much emphasis on the intra-quarter noise and the outlook may be better than they think. Last quarter, both companies lowered guidance due to an inventory build and anticipated worsening pricing conditions. They were right. Pricing was terrible, particularly in May as Seagate burned off inventory at bargain basement prices. I think inventory conditions are much better. Marvell indicated they were seeing better than seasonal demand in notebook drive controllers – that’s a good sign in that notebooks carry a higher ASP than desktop drives. Seagate also has seen very little price deterioration in notebook drives… but it represents 15% of business. The desktop and stand-alone HDD markets are where the pricing was most severe, dropping mid-teens intra-quarter. The channel seems to be in better inventory shape now than it was a month ago.

I’ve been good with the SOX this year. I was very bullish when it was 330. I was negative when it was 420. I have been saying that I thought the SOX would trade to 378 where I wanted to be long.

Tuesday, June 24, 2008

QSII President/CEO resigns

I'm short this. Here's why.

I think fraud will be revealed here in the coming weeks. I tripled the position.

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