MorningWord 7/19/13: Reports of the Death of the PC Are Not Exaggerated, Just Ask $GOOG & $MSFT

by Dan July 19, 2013 9:09 am • Commentary

MorningWord 7/19/13:   Last night on CNBC’s Fast Money we had 2 very interesting guests to speak about Technology earnings, most notably the high profile misses from GOOG and MSFT.  The juxtaposition between the 2 guests could not have been more perfect for the occasion as both purportedly have positions in the aforementioned tech stocks, one of them long them and one of them “negatively positioned” ie short.  The first guest, Dan Niles (clip here) who was a famed sell side tech analyst during the bubble, who now is co-CIO of asset management firm AlphaOne Capital, while the second guest, Dan Morgan (clip here) of Synovus Investment Advisers, which appears to be a more traditional long leaning asset advisory firm.

What I really enjoined about the 2 interviews was Dan Niles’ candor about MSFT’s positioning in the PC space that he knows very well.  To sum up for people, he, for all intents and purposes, thinks they are screwed, and he went as far to suggest that the stock’s ytd appreciation had little to with fundamentals and more to do with exactly what the FOMC’s objective was and remains with QE – get investors to buy risk assets. I made a very similar argument in this space on June 27th in a post titled ” Despite Eye-Popping YTD Performance, What Has Fundamentally Changed for $MSFT?”   I have had some successful and not so successful attempts at being short MSFT in the last year, and unfortunately I am not there now, but do believe that the fever has likely broken and the stock will likely be a short on rallies especially as it is blatantly apparent that their Tablet strategy is nothing short of a disaster, and that PC unit declines may have an even more profound effect in the coming quarters as Windows upgrade cycles continue to wane.

ON GOOG, what can I say, has there been a single larger beneficiary in the last 10 months of AAPL’s pain since its top in Sept 2012 and its subsequent 40% decline?  And I don’t mean from a fundamental perspective, I mean from an investment perspective.  IN the last 10 months, AAPL has shed more than $200 billion in market, almost the amount that GOOG had in its entirety following its Q3 earnings miss in the fall.  Dan Niles reminded us last night that despite GOOG’s marvelous ytd gains that has seen the stock recently make new all time highs, the company has missed earnings estimates for 7 straight quarters – WTF??

The second guest that we spoke with on GOOG, Morgan, seemed a little caught off guard by GOOG’s results (or lack there of) and I tried to press him on the notion that the GOOG might be in a similar sentiment bubble that AAPL had been in for the last couple years. We had just gotten done discussing the massive headwind, and in large part the reason for GOOG’s miss,  lower cost per click for mobile ads hurting margins.  In some ways you could make similar arguments that when margins started to decrease on AAPL’s iOS products due to saturation or stiffer competition, that was the end of the story, finally after their own string of misses, that had been dismissed by AAPL investors and analysts. We were shouting this case to anyone who would listen at the time, but no one did.  Why is it different this time with GOOG, they get a disproportionate amount of their earnings from search, if it has been a trend that mobile search is eating into desktop, and is less profitable GOOG will have to make it up with volume or new higher margin products.   This was the same situation with AAPL last year.  Analysts and bullish investors pointed to greater distribution in China in the future and the savior which would be AAPL TV.  Neither came, and if I was a GOOG investor with fabulous gains, I wouldn’t be waiting for Google Glasses to save the day.

In Sum, 2 high profile earnings misses are not going to be the final 2 nails in the coffin for the rally, but they should serve as a fairly healthy reminder that your most loved stocks can sell off and hard.  I know that is sometimes lost on investors, and usually near the highs!