Regular readers know we have been skeptical of bullish calls over the last couple years relating to a supposed refresh cycles for PCs. It is our belief ( as well as many much smarter than us) that the PC is in the midst of an epic decline despite the potential for growth in the third world.
Recent data supports this thesis. In Q2 PC shipments fell nearly 10% from the prior year, in front of Microsoft’s release of their latest Windows operating system. Shipments for the year are expected to decline 4.5% from 2014, after a nearly 1% decline that year, and a 11% decline in 2013, which followed a 2.6% decline in 2012. You get the point. There are some fairly large secular shifts going on in the PC space, and frankly things are likely to get a bit funkier with Apple’s release of their 12’9 inch iPad Pro (we’ll save that discussion for another post).
For the most part, U.S. investors think about the PC space from the top down, the box makers like AAPL, DELL and HPQ, the operating system provider MSFT and then components suppliers like INTC for microprocessors, NVDA for graphics chips, MU for memory, SNDK, STX & WDC for storage and BRCM for communication chips, (and there are dozens more).
So if we are to try to glean anything from the performance of the stocks that make up the PC supply chain, it makes sense to look from the top down:
- AAPL, still doing very well in PCs, growing much faster than the industry, but they get 70% of their sales from non PC devices. The stock appears to be dead money though as the company will struggle to get back to 10% revenue growth on their expected $232 billion base without a new category (imo).
- HPQ is splitting up, and it will be much easier to track their PC related businesses, but with the stock approaching 52 week lows its safe to assume that it is a near disaster over there.
- MSFT is range-bound between $40 and $50, much closer to the mid point than the wings of the range possibly reflecting enthusiasm for Windows 10 to boost sales this qtr with back to school flowing into the holidays. I suspect the stock stays within this range and that the company is probably getting close to using some of their $96 billion in cash ($66 billion net of debt) to make a transformative acquisition. With CEO Satya Nadella 20 months into his tenure, the two year mark seems about time
- MU & SNDK are down 50% from their 52 week highs, at 52 week lows and have not seen an uptick in weeks. I think it is safe to say the the slowdown in shipments has hurt in multiple ways, inventories have built and that’s putting pressure on pricing. The dollar’s strength has not helped and inventories are clearly pricing these stocks for more downside and no m&a.
- INTC looks like a value trap to us (we had thoughts and a new trade yesterday here), and we think the technical set up spells imminent doom. From yesterday’s post:
It’s been a couple months since we have short exposure in INTC, then playing for a break of what we felt was a fairly obvious long term head and shoulders top formation. It did break the long term support (neckline) at $30 and went as low as $25 in the August swoon.
It has since re-tested $30 but recently failed. We think the stock sets up for another re-test of the mid $20s on weak Q3 results and forward guidance when the company reports October 13th
- BRCM is in the process of approval for Avago’s $37 billion acquisition, the largest ever in tech, I’m sure that will work out great.
- NVDA this is a massive outlier with the stock up 15% on the year, 45 from 52 week and multi-year highs, possibly investors considering the prospects for m&a. With INTC in the process of buying ALTR for $17 billion they are likely out of the running, so possibly a foreign buyer, but frankly I have no clue.
- STX & WDC the disk drive makers both down 37% from their 52 week highs, today making fresh 52 week lows.
Oh and the companies that make the testing and manufacturing equipment in the semi space:
- AMAT down 40% on the year, in an apparent free fall, despite trading 12x expected earnings:
AMAT 5 yr chart from Bloomberg[/caption]
So the stocks in the PC supply chain are telling you that the most recent period was very grim, and it’s unlikely that MSFT Windows 10 will trigger the sort of PC upgrade cycle that would change the fortunes of most the of the companies listed above in the near future.
We have expressed our bearish view on tech in an Oct QQQ put spread (read here). But given the QQQ’s heavy exposure to non PC names like AMZN, GOOGL & FB, (making up about 17% of the etf) we may look to shift our focus to specific names as we did yesterday in Intel. The next couple weeks before earnings season starts will be critical, the lower these stocks go into their results the worse the risk reward is in taking a bearish view. Also, we will keep our finger on the trigger to close QQQ and INTC on weakness as we are cognizant of the potential for sharp counter-trend rallies.