On the Eve of Q2 CY11 Earnings

06/07/2011

What are technology companies going to tell us over the next several weeks?  Already they have told us plenty.  I did read an email from www.streetaccount.com (which I love as a service) stating that so far they tracked 119 updates, 27 increases (6 full year), 42 decreases (5 full year) and 50 reaffirmations (25 full year) and that was as of Friday, July 1st.  There were a few new pre negatives in the last few days.  Companies that pre-announced disappointing results in the quarter that I wrote down were:

– Phillips said “In Consumer Lifestyle, the traditional consumer electronics market, in particular in Western Europe, is facing ongoing weak demand, declining license revenues and the impact of the TV disentanglement. This will more than offset double-digit growth in Personal Care and Health & Wellness…”  Translation we want to look good because we are going out because we had to cancel the cable connection?  🙂

– Tom2

– EXFO

– WLF

– Progress

– NTCT

– RVSN

– SPIL

– NOK

– DRWI (Reported last night in line with pre but guide was short of consensus)

– TSRA (Last night)

In the last few months RIMM, CSCO, HPQ, FNSR and CIEN all reported and forward guidance was not so hot.  It seems that companies trading on growth multiples can expect a quick 30% off the top if they do not live up to expectations.  If CEOs are not crisp with their answers on the sustainability and linearity of their growth during intra-quarter conference season; they should expect a 25% haircut in anticipation of the actual results.  Why are the multiples high for growth companies and why are the haircuts on misses so fast?  I have some thoughts on the matter.

Large Cap Stocks are Dead

Let us start with the premise that large cap tech stocks are dead.  There are a few exceptions, but for the most part investors are not excited about MSFT, GOOG, CSCO, INTC, etc.  Absent growth, investors seek capital appreciation in high beta growth stocks and this is especially true for the technology sector.

Market is Cheap

Over the past few days I have seen the market is cheap call start in strategy notes and on CNBC.  A PM friend recently said to me that the market is cheap call is the excuse for PMs to buy beta.  The question he poised was whether a group of cheap stocks were masking a group of wildly expensive stocks, thus making the market multiple appear “cheap” or “okay.”  I will stop translating his words and just quote directly from his email “So instead of buying the cheap stock, the average PM says ‘gee the market is reasonably valued, I will go buy some beta’ – so they go buy MORE of this stuff that is wildly expensive already and it gets worse, not better.  It is a market of individual stocks; it’s not a single market.  And the average PE thing is really distorting.  Need to really go industry by industry, stock by stock.  Then tell me if the ‘market’ is cheap or expensive.  And I really think it’s stock by stock.”

When Growth Falters, Buy Something Quick

Here is an article that says that FFIV is going to buy ALLT for $450-500M.  This is somewhat interesting because the last time FFIV bought a company for $400M is was Acopia and that did not work out well.  The question is why would FFIV want to spend ~5% of their market cap on ALLT?  I think the answer is when growth falters, buy something quick.  I could be wrong, but this assumption has proven true many times in the past.  It should all be clear when FFIV reports their results and we can get management’s view as to the market TAM and growth rates.

The Key is in the Details – Not in the ETF

I think another problem with the market is ETFs.  I think it is too easy for funds and individuals to decide that they want exposure to semis or software or materials and to get that exposure through an ETF.  Why do the fundamental work when you can get long semis, short telecom services and get a basket of cloud stocks without having to read anything about any company?  It is easy to be long some tech ETFs and hedge through some double short ETFs on the broader market if Greece blows up.  This is why my blog has been about product cycles.  The details are in the product cycles within the individual company – it is not in the ETF and not in getting long beta because the market is cheap because a math wiz ran a bunch of correlations back to 1920.  Maybe that is why the market goes up 5% last week on very little news, low volume and the wildly overpriced stocks built on high growth expectations have a deep downside when future expectations do not live up to current realities.

Long Tail of Legacy Tech

When earnings start, I am going to be listening for information around two primary themes and several near term data points.  The first theme is for the large cap technology companies that have a long distribution tail of legacy business like CSCO (August), INTC, JNPR, and DELL (late in the Q).  How fast is your business eroding or is it stable or growing?

The second theme is around the high multiple growth companies like RVBD, ARUN, FFIV and APKT. I want to know if growth expectations are still in tact and if your growth markets are taking share from the large cap companies with legacy markets.  As for data points, here they are:

– ADTN…tell me about CAPEX.

– T and VZ…tell me more about wireless ARPU and CAPEX

– AAPL…tell me about the iPhone and the iPad

– AKAM…forward view of the business and CDN trends

– JNPR…was the Q as bad as it sounded at the BofA/ML tech conf?

– CSCO…will report in August, you are the first to tell me about July

– QCOM…MSM units and pricing trends

– JDSU…is your view different from FNSR?

– EMC/VMW…all about big data and virtualization trends

– Cloud Data Centers…what is the adoption rates for public DCs?

– Europe…how is business in Europe?

/wrk

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