MorningWord 11/13/12: Brick by brick, it seems that investors are taking apart this year’s tech rally in that had largely been built by a handful of large components. Q3 earnings season started out with fairly sizable disappointments from INTC, IBM & GOOG, and spread their way to AAPL, AMZN, MSFT, TXN, JNPR. To be fair there have been a few bright-spots, namely: EBAY, YHOO, FB & QCOM, but in most cases, the surprises can be largely explained as stock specific.
Make no mistake about it, consumer spending for technology products is becoming a bit more fickle of late and there are becoming clearer and clearer winners and losers with many key product categories increasingly looking like 2 horse races (sorry MSFT). As it relates to Enterprise Spending, it appears that many managements would rather plow their cash into Treasuries yielding 1.65%, pay dividends and buy back their own stock rather than invest in their business. Most Fortune 100 tech CEOs are not exactly in the Obama camp and are probably less inclined now to deploy capital in the face of that what many believe is an outright Obam’ination as it relates to the White House’s largely fictitious anti-business policies. C-level executives who are likely to see their tax rates come under attack, both personally and professionally appear to be incentivized to “play possum” for the time being and see how the little “fiscal cliff” thingy plays out.
Oh, back to tech stocks. There will be no PC upgrade cycle, tablets and smart-phones are cannibalizing PC sales, carrier spending for telecom equipment is depressed, more and more profits in technology are being concentrated among a smaller and smaller group and spending across the spectrum seems paralyzed with today’s excuse being the “fiscal cliff” but could be interchanged for the 2011 and summer 2012 reasons of Euro debt crisis or slowing global growth. We have talked about all of the issues for months on the site, and what appeared to be fairly clear to us is now just starting to resonate with large holders of these perceived safety stocks, as investors seemed hypnotized by many of these stocks fortress balance sheets, low valuation and healthy dividend yield. If you want to park many in some of these names have a ball, but recognize the days of dramatic growth are done, and now it becomes a fancy game of financial engineering to make most investments in the stocks look more like fixed income investments.
In the next few weeks, and starting tonight, we will get another spat of results from off-cycle tech companies, starting with CSCO tonight, NTAP and DELL later this week and HPQ and CRM next. For the most part I think expectations are low for all except CRM, but I don’t see any doing much for already depressed sentiment in the space.
We previewed CSCO’s fiscal Q3 earnings event (here), and frankly see little chance of an overwhelmingly positive take away given recent carrier comments regarding capex, and their competitors results and guidance given last month, and don’t forget, CSCO CEO John Chambers is not only a big Republican, but he is a HUGE Republican. I can’t see him really sticking his neck out on outlook when Obama holds the key one of the near-term uncertainties.
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MorningWord 11/12/12: As a 40 year old dude with a wife and 2 kids, I don’t get to watch nearly as much NFL football as I once did and that I would like to. My viewing usually starts midway into the second afternoon game with repeated family and work related interruptions until I pass out in the 3rd period of the evening game. Ok maybe a little too much info, but this is where I kind of tie it all in, was it just me or was your NFL time yesterday totally ruined (regardless of the network) by the incessant barrage of un-watchable MSFT Surface commercials?? I mean, I guess you can’t argue with MSFT and their hardware providers of Windows8 to give the whole thing a shot, but come on, I have to assume that they scared away more consumers with that whole “Click” business than they were likely to gain. If you havn’t seen the commercial, have a go, but I advise that you do so with any empty stomach and then tell me I am wrong:
I’ll give you a moment to get it all together………….ok, back. I don’t get MSFT’s foray into hardware; they are likely to alienate any potential hardware partner who was possibly inclined to license Windows 8 for tablets whether Surface succeeds or not. But let’s be honest, it doesn’t have a chance of being a profitable endeavor. If you are a Bull on MSFT for the obvious reasons – strong balance sheet, strong cash flow generation, high recurring revs, low valuation and 3.2% dividend yield – I get all that, probably a safe place to park some cash. If you expect a Windows 8 upgrade cycle, or the company’s entrance to the tablet market on the hardware side to help re-accelerate sales back above single digits, I wouldn’t hold your breath. It seems like the more MSFT tries to innovate on an already existing category, the more they set themselves up for failure (see Bing, Lumia & Zune). I guess you can’t fault them for trying, but at what point do investors just say enough is enough.
Obviously I am not a fan of the stock, and think that north of $30 could be a great entry point for a bearish position heading into the new year as Windows 8 sales are likely to disappoint for a whole host of reasons, the largest being sluggish corporate tech spending due to global economic uncertainty. But the realization of MSFT’s initial failure with the Surface is likely to be fairly bad for sentiment.
One caveat on the short side for the next month would be the potential speculation that the company pays a special dividend to shareholders prior to capital gains taxes going up in 2013. The company has $66 billion in cash on their balance sheet. Given their acquisitions of the last 5 years, Aquantive, Yammer and Skype to name a few (MSFT recently wrote off the entire $6.2 billion purchase price of Aquantative), I bet investors would have preferred to have the cash instead. SO my point there is that SKYPE is likely to be a loser, YHOO would have been a massive loser in 2008, so this company seems like they have no clue how to acquire companies and use them to add value. Huge dividends seem in order, and investors may start to get enthusiastic about the prospect of a special dividend as the company has done so in the past ($3 special in 2004).
If the dividend tax goes back to levels pre-2001, the rate could go next year from 15% to ~40%, when you consider that Bill Gates and Steve Ballmer own about 9% of the stock combined, I would assume this would be a fairly decent outcome for their own personal finances! So be ready for the speculation to begin, which could give bears a better entry point for a bearish trade for fiscal Q2 results expected in late January.
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