Barron's sulla tecnologia - gz
By: GZ on Lunedì 12 Agosto 2002 12:07
Il lunedì spesso si cominincia dalla "storia" maggiore di copertina di Barron's e quella di sabato era sulla tecnologia e su come sia ora comprabile con cautela. Ovvio che si può leggere a rovescio come segnale di sentiment ecc..., ma in ogni caso vale la pena di notare alcune cose.
Come noto "gli analisti" non sono solo quelli di Wall Street con conflitti di interessi perchè vendono IPO e fanno affari con le aziende, ma ci sono anche dozzine di società indipendenti di pura ricerca e analisi senza conflitti di interesse.
In particolare Soundview è una delle migliori per la tecnologia e trovo interessante che sia toro sulla tecnologia.
Tra le altre cose di questo pezzo noto che ^STM#^ nei semiconduttori sia trattato in termini relativi come uno dei favoriti (grazie all'esposizione all'elettronica di consumo in prevalenza rispetto a pc e infrastrutture)
^Hewlett Packard#^ ad es ora costa 0.5 volte i ricavi attesi per ottobre 2003 e meno di 10 volte gli utili del 2003.
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Soundview's Arnie Berman argues that when the IT spending logjam breaks, the first checks will be written to hardware companies. His theory is that IT departments have postponed buying even the most basic items, and that these items -- PCs, servers, printers and switches -- can often be purchased at the departmental level without executive approval. (The same isn't true of other tech products, such as servers and enterprise software.) While Berman may be right, we fear many hardware companies will be hampered by sluggish PC demand -- and we doubt corporate IT spending will recover even modestly before 2003.
Even so, we're bullish on several companies in this category -- and the one we're most enthusiastic about is Dell Computer. None of Dell's rivals have figured out how to effectively compete with Dell's direct-sales model. Indeed, the company's success was the obvious driver behind Hewlett-Packard's merger with Compaq. Dell continues to gain market share in the U.S. and abroad, it has a solid balance sheet with about $8 billion in cash, and it's zeroing in on potentially large new product areas.
The one catch? Valuation. The stock trades for 30 times expected earnings for the January 2003 fiscal year. And PC demand is hardly robust. Microsoft recently said it expects PC unit growth of 5% or less for its own fiscal year ending June 2003. That suggests Dell's growth -- the Street expects 13% higher revenue in the January 2004 fiscal year -- must be driven by market share gains and expansion into new markets.
Still, we tend to side with the bulls, who expect Dell to grow by applying its direct-sales model to additional technology products. Steve Milunovich, tech strategist at Merrill Lynch, says he's bullish on Dell "not so much for its PC business, but rather for its ability to move up into routers and storage and servers." The company also seems to be making plans to attack the printer market, where it currently has no products of its own. Bob Rezaee, a portfolio manager at Montgomery Asset Management, sums it up: "Dell benefits from the commoditization of technology."
On Hewlett-Packard, our gut instinct was that the Compaq merger was a bad idea, destined to create the next Unisys, a big, sleepy, low-growth tech company. Nonetheless, the stock is statistically cheap -- far cheaper than the other large- cap tech companies we looked at for this story. At a recent 12.92, H-P now trades for about 0.5 times expected revenues for the October 2003 fiscal year, and under 10 times projected fiscal 2003 earnings. Goldman's Conigliaro calls it "dirt cheap, the cheapest computer company by far."
There are reasons for the low valuation, of course. Integration problems have slowed some H-P segments; the company still must prove it can wring the expected savings out of the merger. And the stock has been hurt by speculation about Dell entering the printer business.
While H-P faces big challenges in PCs and other computing segments, it remains the premier manufacturer of printers. Dell is more likely to partner with Lexmark or Canon than it is to make its own printers; H-P bulls see little chance of significant near-term impact on H-P's printer business. H-P's imaging segment reported just shy of $5 billion in revenue for the latest quarter; given a $20 billion run rate, we think the current market value of $37 billion would almost be reasonable for the printer business alone. By contrast, rival Lexmark trades for about 1.2 times expected 2003 revenues.
"Everyone hates [H-P Chief Executive] Carly [Fiorina], but she's not evil incarnate," says Soundview's Arnie Berman. If this company can ultimately generate revenues equal to the combined results of H-P and Compaq for 2000, he notes, and can realize the expense synergies management has promised, the company could eventually earn $2.20 a share. "Now, the market does not believe that," Berman adds, "but the stock clearly trades for a low multiple [based on its] earnings potential. It can certainly move higher."
Sun Microsystems, once the dot in dot-com, is now the dot in dot-bomb. Trading today for under $4 a share, the stock is down more than 70% this year, and over 90% from its 2000 peak. Having dominated the server market for Internet startups, telecom companies and financial-services firms, Sun has been hammered by the swoon in tech spending in those sectors and by increased competition. Kevin Landis, portfolio manager with the San Jose, Calif.-based FirstHand Funds, says the server business has become a "food fight," with IBM and H-P trying to under-cut Sun's prices. "And it's working," he says. "I'm worried about them."
He's not the only one. Montgomery Asset Management's Rezaee thinks Sun has been too slow to cut costs. "In the latest quarter, Sun had roughly $3 billion in revenue," he says. "I don't understand how you can have $3 billion in revenue and not be profitable. They're trying to fight too many battles -- proprietary chips, their own operating system, the software -- you can't be everything to everyone. Their business model was not designed for standards-based pricing and gross margins. The environment just doesn't favor Sun."
We admire Sun CEO Scott McNeally's shoot-from-the-hip style. But given the troubled backdrop -- and shares trading for 30 times expected June 2003 fiscal year earnings -- we would avoid Sun for now.
Cisco Systems was the poster child for the late-'Nineties bubble. As a producer of routers and switches for corporate networks, the company provided the plumbing for the broad expansion of the 'Net. The company's market value at one point reached half a trillion dollars.
Now it's down to less than $100 billion, badly bruised by slowing corporate spending. John Chambers, Cisco's courtly CEO, remained resolutely bullish on Cisco's growth prospects long after fundamentals had begun to deteriorate -- for the July fiscal year, the dream of regular 30% to 50% revenue growth was replaced by a nearly 15% decline. Even so, the stock carries a respectable multiple, trading at 25 times expected earnings for the fiscal year ending July 2003, and nearly four times estimated sales.
Last week, Cisco reported profits for its fiscal fourth quarter, ended July, that slightly beat Street expectations. Revenues rose 12% from the year-ago quarter, and gross margins grew to a higher-than-expected 67.7%. Even in the current moribund environment, Cisco produced sequential gross-margin improvement in each of the past four quarters. While Chambers indicated continued weakness in the telecom sector, he reported that demand from corporate customers was higher than expected in the quarter. And he noted that the company has steadily been gaining market share from rivals.
"It's the last man standing" in networking equipment, notes Paul Wick, portfolio manager of the Seligman Communciations & Information fund. The once formidable roster of Cisco competitors, he notes, now looks like a list of the walking wounded: Juniper Networks, Alcatel, Nortel Networks, Lucent Technologies and Ericsson. Cisco, in contrast, has about $20 billion in cash and investments, a bigger stash than any tech company other than Microsoft.
"Cisco's competitive position has been enhanced by the downturn," says Integral's McNamee. "It has never been as well-positioned relative to the competition as it is today." Cisco has made aggressive use of its financial strength to add customers, particularly in the difficult telecom market. "The carriers are really hurting," McNamee observes. "And the guys who sell to carriers are really hurting, with a capital H. Cisco goes to the carriers and tells them, take our product, and pay me in a year. The competitors can't do that. Cisco can afford to wait a year, and grab the customer. Ballgame over. They are making the bet that the revenues at risk are small compared to potentially owning those accounts at the end of this. It's smart accounting, and smart business." And a good stock to own.
"With Cisco, my conviction is higher than on just about any other company," says UBS Warburg's Pip Cobrun. "They have 85% of the router market and 65% of the switching market. They are dominant in their distribution channel and they have mediocre competition. As long as you think they can manage the business back to 25% operating margins" -- in the July quarter, Cisco's operating margin hit 21.5%, up from the low single digits a year earlier -- "you can feel good about the story even without much top-line growth."
Like Cisco, EMC was once a huge investor favorite, dominating the market for high-end data-storage systems. But the company's once-fabled margins have been eroded by the emergence of considerable competition, and the stock has taken a beating: Now trading at about $7, it is down dramatically from more than $100 a share in late 2000.
In response to the shifting competition, EMC has been beefing up its storage-software offerings, including features allowing the integration of its hardware with competitive gear. The company has also been an aggressive cost cutter. "They're doing all the right things after an incredibly hard time," says Soundview's Berman. "Last year the competition was finally competitive -- they would have had problems in 2001 even if tech spending was good. And EMC is far more advanced on the software front than their hardware rivals, like Hitachi and IBM."
EMC is a corporate turnaround story, not a simple bet on improved corporate IT spending. On a statistical basis, the stock is hardly bargain priced, trading at a lofty 41 times expected 2003 earnings, but robust IT spending in 2004 would boost profits considerably. A bet on EMC will require more patience than other hardware stocks -- the company and its investors have to adjust to a storage market that is a far more competitive place than when EMC dominated the playing field. We think it will be a difficult adjustment. While we agonized on this one, we can't recommend it.
Groping for the Floor
Semiconductor stocks continue to ratchet lower, as chipmakers report a steady stream of bad news -- the Philadelphia Semiconductor index has been cut in half since April. And it may not be over quite yet. It's worth noting that Cisco's surprisingly good gross margins in the latest quarter were partly the result of lower component prices. While some chipmakers will benefit once IT spending rebounds, we would tend to avoid those with high exposure to the personal computer and cellphone sectors.
Ergo, we cannot recommend Intel. No question, the company still has firm control of the microprocessor business, even though rival Advanced Micro Devices has some new chips in the works that could challenge Intel's lead at the high-end of the market ("The Next Big Thing," Aug. 5). Intel has a strong balance sheet, smart management and cutting-edge factories. But its fate is inextricably tied to the PC demand cycle -- there is little room to increase market share, the way Dell can, and efforts to move into the communications sector have been disappointing.
And there's another issue: At 32 times expected 2002 earnings, or 4.4 times anticipated revenues, Intel is no cheap stock in an environment where PC demand is growing in the low single digits.
"It's hard to imagine Intel not having a dominant position," says FirstHand's Landis. "The issue is the saturation of the opportunity. This is the ultimate example of a company that made the most of one of the greatest business opportunities ever. But now what?" Sell it, we suggest.
Landis thinks STMicroelectronics offers a smart alternative. "I was looking at Intel recently as a way to have more semi exposure, because that's what everyone will run back to when demand turns," he says. "But it's hard for Intel to grow. I wanted a big-cap, reasonably priced, well-known liquid stock. And STMicro fit the description." Landis notes that, like Texas Instruments, the company has broad product exposure serving multiple markets. One difference: Where TI has more exposure to the communications sector, STMicro is more tied to consumer electronics. The company has some exposure to the cellphone market -- Nokia in particular is a big customer -- but it also does considerable business in industrial and automotive applications.
Headquartered in Geneva, Switzerland, STMicro trades for 20 times projected 2003 earnings, and 2.3 times projected revenues. That makes it cheaper than TI, which changes hands for 26 times expected 2003 earnings and 3.5 times revenues.
We have recently waxed bullish on Texas Instruments ("Ready to Rebound," July 1), which in recent years has reconfigured its business to focus on analog and digital signal-processing chips. TI has been showing improving revenue and profits, though it sees moderating growth ahead. While still impressed with the turnaround story, we've lately become concerned that the Street has largely discounted the rebound in TI's fortunes. We worry about the company's high relative valuation and its significant exposure to the cellular-handset market. It would be easy to be enthusiastic at lower levels. But for now, pass. For a broad-based semiconductor bet, STMicro, with heavier exposure to consumer-electronics gear, looks cheaper.
Of the stocks reviewed here, none seems more attractive than Taiwan Semiconductor, the world's biggest maker of silicon chips for other companies and a pioneer of the foundry model in which chips are made to order for a wide range of semiconductor companies that don't have factories of their own. "The semiconductor industry is so capital intensive now that the argument for using a foundry to make your stuff has never been better," says Soundview's Berman. "In the last cycle, foundries gained a lot of share at the lagging edge, where they were able to make parts more cheaply." But now, he adds, they have leading-edge capability, with technologies like 300-millimeter silicon wafers. And that means a new set of customers.
"Texas Instruments, Motorola, STMicro and Advanced Micro Devices, historically integrated vendors, have decided to outsource at least a portion of their manufacturing -- they're all adopting asset-light strategies," says Integral's McNamee. "TSMC and UMC [United Microelectronics] are disproportionately advantaged by this. Both TSMC and UMC have always been great companies, but they had been too expensive to own for a long time. Not anymore." The stock trades for just under 17 times expected 2003 earnings. We'd buy it, though there is one caution: TSMC can periodically get caught up in politics. When tensions between Taiwan and China heat up, Taiwanese stocks tend to cool off.
Micron Technology, the dominant producer of the computer memory chips known as DRAMs, has gained market share in recent years as the memory business has endured difficult times. In recent years, the sector has suffered from severe overcapacity, resulting in the recent financial distress at Korea's Hynix Semiconductor and the exit of several other players.
The problem with Micron? It sells commodity parts with close ties to PC demand. "The company loses money at least one out of every two quarters," says Seligman's Wick. "It's a bad business, and capital intensive. The company has $11 a share in book value, so at at about 18, it's at a level without much more valuation risk. But I wouldn't be long."
Neither would we. Micron might make sense if you believe in a big coming PC cycle -- but we don't. Micron is a stock to trade, not to buy and hold.
Applied Materials and other equipment makers have been under intense pressure as Wall Street rethinks its expectations for the semiconductor-equipment sector. Applied maintains that three concurrent technology trends will continue to drive sales of semiconductor manufacturing equipment: a shift to 300-millimeter silicon wafers from 200 millimeter wafers, a reduction in circuit line widths, and a switch to copper from aluminum for certain chip circuitry.
While that's true, the timetable on adoption of those technologies is stretching out. Intel, AMD, UMC and TSMC all recently cut capital spending plans in the face of slower component demand. Weak PC and cellphone sales will hamper the chip recovery and push out a pick-up in the equipment business. And Applied remains pricey: The stock trades for 20 times expected earnings for the October 2003 fiscal year and 75 times current-year estimates. Moreover, we suspect profit projections may be too high. In other words, the stock may yet trade lower. We'd avoid it for now.
You may not like its tactics, but from an investor's view, there's a lot to like about Microsoft. For one thing, the company will be a direct beneficiary of any pickup in PC sales, thanks to Windows and Office. More intriguing for the long haul is Redmond's increasingly aggressive bid for a greater slice of the corporate market, where it has not traditionally been a big player. Microsoft continues to push its .Net strategy for simplifying the links between software programs, which should give it an increased presence in corporate IT departments. Meanwhile, starting at the low-end of the market, Microsoft has begun sneaking into enterprise applications, territory historically controlled by SAP, Siebel Systems and Oracle. While Microsoft has gotten more press for its efforts at "controlling the living room" via its Xbox game player, the bigger opportunity lies in gaining an increased share of corporate spending.
Microsoft has a few other things going for it, including roughly $10 a share in cash and investments -- some investors argue that it's time for the company to start paying a dividend -- strong management, and a stock off nearly two-thirds from its peak.
Bill Whyman, an analyst with the Washington-based Precursor Group, thinks Microsoft's .Net Web services strategy could eventually become a big factor. "If Microsoft is stuck on the PC, then growth will mature," he says. "If .Net succeeds, the company will be let loose in the enterprise, and the established incumbents should be saying, 'Uh-oh.' If Microsoft can get off the PC, it opens up a $90 billion enterprise-software opportunity, of which it now has a very small share."
Not the least, the stock seems reasonably priced. "The last time the stock was at anywhere near these valuations, it looked like most of its legal problems were in front of it," Berman says. "It now looks like the problems are mostly behind it." We agree. Buy it.
While you're at it, buy some Oracle. In recent years, the database giant has suffered not only from the IT spending slowdown, but also from concerns about lack of management depth and market share losses in it applications business.
All of that has hammered Oracle's stock: The shares are down about 35% this year, and more than 75% since the Nasdaq peak in early 2000. Even so, the stock is not statistically cheap, at about 23 times expected earnings for the May 2003 fiscal year, and about five times next year's revenues.
Still, we think Oracle is likely to expand its applications business as corporate customers become increasingly interested in choosing fewer and larger vendors, which favors application "suites" over "best of breed" choices from smaller software companies. The company is likely to continue to dominate the database software market. And Oracle has smartly expanded its services business, eating up business that might otherwise go to consulting groups like Accenture. Oracle will survive and thrive.
For similar reasons, we like SAP, which dominates the market for enterprise resource planning software. Surveys of IT managers consistently show widespread plans to spend on the category. SAP has a huge installed base of large customers who continue to pay SAP for service and support. Revenue and earnings should show double-digit growth in 2003 and beyond; the stock trades for 22 times 2003 earnings, a comparable valuation to Oracle. And like Oracle, the company is likely to benefit as IT departments prune the number of companies from which they buy services. Though we caution that any delay in the IT spending recovery will cause trouble, we're cautiously bullish.
To calm your frayed nerves, imagine you are a technology investor sitting under a palm tree on a sugar-sand Caribbean beach, watching dolphins frolic in the lazy, deep blue waves. In one hand you hold a rummy island beverage; in the other, two years of brokerage statements. They show you own only one stock. You read them, lean back and smile.
That's because the one stock is credit-card processor First Data, the only one of the 20 largest tech stocks to actually gain ground since the March 2000 bubble; First Data's shares are up more than 60% since that time. Look at the stock chart, and you might think it was upside down.
While First Data isn't everyone's idea of a tech stock -- it doesn't make chips or hardware or routers -- the company is a major consumer of computing resources. First Data, which also operates the Western Union electronic-money-transfer business, has continued to grind out steady revenue and profit growth, a fact that the market has richly rewarded. It's hard to find fault with its business -- or the stock. The shares trade at 20 times expected 2002 earnings, or less than 18 times 2003 estimates; top-line growth is holding steady at about 10%. First Data has been a good place to seek shelter from the storm. If we were anticipating a V-shaped tech recovery, we might urge leaving First Data for purer tech plays. But for now, it seems a sensible hedge against broader exposure to corporate IT spending.
You might argue that we should cut-and-paste our review of IBM and slot it up in the hardware section. But Big Blue has made a determined move away from hardware and into services. The most obvious demonstration of that: the recent agreement to acquire PwC Consulting, which contrasts with a previous decision to exit disk-drive manufacturing.
"It is gradually becoming a healthier company, in the sense of pruning businesses that are absolute drags, and taking costs out, and trying to be more transparent in the information it give out," says Goldman's Conigliaro. "It's also trading at the low end of its historical valuation relative to the S&P 500."
IBM, like Oracle, Microsoft and SAP, should benefit as companies concentrate their technology spending with a smaller number of vendors. Though there no doubt will be some integration problems with the PwC deal, IBM proved a shrewd buyer-it is paying 0.7 times sales, comfortably below the multiples for comparable public companies. With IBM trading at about 14.5 times expected 2003 earnings, the shares are reasonably priced. The stock is a Buy.
Cheaper than IBM is Electronic Data Systems. EDS shares have been pummeled in recent weeks; it has been an IT services provider to WorldCom. Worries about the deal have left the stock trading at just 10 times expected 2003 earnings of $3.43 a share. In a recent research report, Merrill Lynch analyst Stephen McClellan brands the stock "a rare value for patient investors," even after sharply marking down the company for the WorldCom exposure. We see no reason to expect any slowdown in corporate outsourcing of data centers and other business processes -- though McClellan says EDS shares could be stuck in neutral until it wins some more "megacontracts." That said, EDS looks like one of the better bargains among large-cap tech stocks.
Cut The Cord
Let's be blunt. We're worried about the cellular business. The issue is relatively simple. The market for cellular voice traffic is maturing. The cellphone companies think they can stimulate replacement demand with color screens, built-in cameras and other new features. And yet most people use cellphones to make voice calls. We fear current estimates for handset sales for both this year and next year are too high -- and if that's true, the stocks could see another down leg.
Merrill's Milunovich says the cell- phone makers are suffering from a condition Harvard tech guru Clay Christensen calls "overshoot," meaning current technology is already more than good enough for most users. In markets where that happens, Milunovich says, profits shift from systems companies, such as Nokia and Motorola, to component companies, such as Qualcomm and Texas Instruments.
Montgomery's Rezaee says he'd be a buyer of Qualcomm shares "once the dust settles." The company's CDMA technology has a strong foothold in Korea, Latin America and in the U.S., where Sprint and Verizon have standardized around it. Unlike Motorola or Nokia, Qualcomm does not make phones. Rather, it collects licensing fees from systems using CDMA technology, and it sells chips for CDMA-based phones. With the stock trading for about 23 times expected earnings for the September 2003 fiscal year, though, it seems fully valued.
Of the large handset companies, Motorola is having a better time of it for the moment than Nokia. While Motorola has been showing some results from a long restructuring process, its Finnish rival has lost some market share. Motorola is "doing things it should have done years ago," as Rezaee puts it, although it remains to be seen if the company can produce reliable revenue growth.
Nokia dominated the phone business in the late 1990s, thanks in part to ineffective competition from Ericsson and Motorola. But competition has heated up. Though not in our top 20, the company gaining the most ground in the wireless phone market at the moment is Samsung. Meanwhile, the sector as a whole could see more disappointments, as the industry's struggling carriers attempt to lure investors to use additional services made possible with so-called 2.5G and 3G services.
Neither handset maker looks expensive at the moment -- Nokia trades for 14 times expected 2003 earnings, versus 24 times for Motorola, though Motorola looks cheaper on a revenue basis, at 0.9 times expected 2003 results, about half that of Nokia. And yet we think estimates, and stock prices, face one more down leg. For now, we would not be buyers of any companies in the handset business.
The bottom line: There are tech-stock bargains to be had, but investors should tread cautiously; some of the bear's wounds will prove fatal. The PC, cellphone, semiconductor, chip-equipment and enterprise-software businesses will continue to struggle. And yet it turns out the tech sector is not as dead as you thought. These difficult days will allow a handful of well-positioned companies to extend their lead. So cheer up. Go buy yourself a cellphone, a PC or a DVD player. And start writing that tech-stock wish list.
Edited by - gz on 8/12/2002 10:56:2