QUICK NOTE, in Yesterday’s MorningWord I stated that AAPL’s CEO Tim Cook speaks today at GS’s tech conference at 4:15pm eastern, that was incorrect, the schedule that I was quoting must have been old, he speaks today at 10:15am eastern per AAPL’s investor relations Website (here).
MorningWord 2/12/13: This morning JPM downgrades their rating on QCOM from Buy to Hold, as they feel 2013 will mark the tipping point for smartphone adoption and they will ultimately see growth grates slow and margins decline. If AAPL’s year over year margin decline in Q1 (down nearly 10%) is any indication, this is a trend coming to a theater near you for the smartphone supply chain. I would add that a market share and technology leader like QCOM is likely to be far more insulated from these pressures than an OEM. BUT it makes a lot of sense for investors who have been involved in the secular trend towards smartphone to keep a close eye on saturation, and probably not wait till AAPL & Samsung have sold their last iPhone 6 or Galaxy 5 to the last human who can afford one to lighten up on their bullish thesis on the space. Widely followed Asymco.com blog had a great chart last month showing the trajectory of smartphone penetration (below).
While Smartphone bulls will agree that North America and Western Europe are not where the next leg of growth will come, it is hard to argue that margin pressure won’t become an issue in emerging markets despite what could be decade long penetration process.
As for QCOM, I have been waiting to buy on a pullback to the low 60s. There are very few large cap stocks that have expected earnings and sales growth of 10% and 20% respectively that trade slightly above a market multiple. QCOM has a rock solid balance sheet with almost 25% of their market cap in cash, pays a dividend with a yield of 1.5% and has a monster share buy back. All of this should help the stock weather broad market weakness, but not likely to help in the event of secular smartphone slowdown. So I reiterate, if 2013 will be an inflection year for the smartphone industry, timing of investments will be very important.
As for the downgrade, I would note that JPM analyst Rod Hall did something that I have not seen in a while, an analyst being preemptive about his rating and price target (he saw little upside to his $70 price target and no reason to raise estimates to justify a continued Buy, so he goes to hold…..bravo…time will tell if he is right). For the most part, Wall Street vets will tell you that price targets and ratings don’t matter, and for the most part I agree. Except sometimes they can be a decent indicator of impending sentiment shifts. QCOM is one of the most loved large cap tech stocks among sell side analysts, with 41 Buys, 4 Holds and 2 Sells, for comparison sake two other well loved tech stocks have a bit more sell-side caution, GOOG has 28 Buys, 15 Holds and 1 Sell and EBAY with 30 Buys and 12 Holds, No Sells. So the point here would be is Hall’s analysis and near term cautious view an outlier or the start of a trend that could weigh on QCOM shares?
MorningWord 2/11/13: I think it is fair to say that Q4 Technology earnings were a mixed bag, for instance semiconductors heavily exposed to PCs struggled (INTC), while those exposed to smartphones & tablets flourished (QCOM), smartphone manufactures still trying to hold onto every last once of margin (AAPL) felt market share pressure from those looking to undercut on price with broader offerings (Samsung & GOOG). While these trends have been emerging for the past few quarters, they are likely to continue for the foreseeable future.
With most companies have just reported trailing results and given at least guidance for the current quarter, most investors would likely expect to be in a bit of quiet period until we get towards the back end of Q1 and we get into “pre-announcement season”. This week is likely to be a bit of an anomaly as Goldman Sachs hosts their anual Technology Conference with some VERY notable key note addresses throughout the day on Tuesday; Tim Cook CEO of AAPL on Tuesday at 4:15pm et, YHOO’s CEO Marissa Mayer 3:30pm et, EBAY CEO & John Donahue at 11:10am (full schedule below). It is likely way to soon for any business updates since all three company’s gave Q1 guidance in the last 3 weeks, but it does give companies like AAPL and YHOO the opportunity to speak to the institutional investment community directly about recent cash management concerns in AAPL’s case or a broader sense for a turnaround at YHOO.
While I don’t expect too much market moving commentary, I would expect managements to highlight recent successes and do their best to soften the rhetoric around disappointments. In AAPL’s case, I wouldn’t expect too much additional commentary centering on their plans for cash return to shareholders after the company’s very public statement on Thursday that they were considering additional options prior to their shareholder meeting on Feb 27th.
Here’s the full schedule: