With Nasdaq yielding the exceptionally high return of 3.6% since the beginning of the new year, against less than 1% for all the other indices, the index will face its first test this week as the results posting season by the big technology companies gets underway, with three sector leaders first in line to step to the fore. Intel Corporation (Nasdaq: INTC) will set the ball rolling today with its report after the bell, followed tomorrow by Apple Computer Inc. (Nasdaq: AAPL), and then IBM (NYSE: IBM) on Thursday. IBM is not listed on Nasdaq, but its results and guidance could affect the entire Nasdaq technology sector.
Investors want Intel to prove to them that Advanced Micro Devices Inc.’s (NYSE: AMD) profit warning related to that company only and not the entire sector, while Apple, whose stock is currently cruising at an all-time high, will be expected to provide the same kind of pyrotechnics in its results and guidance as it does in its product launches. IBM too will be expected to unveil strong results that will justify the stock’s climb above the $100 level last week for the first time in three years.
Last Friday, investors treated the AMD warning as a local incident, and as result, the stock lost 9.5%, while its rival Intel gained 1%. According to Bear Sterns, the event that led AMD to issue its stiff warning was the price war for server microprocessors that Intel recently imposed on it, since AMD had the highest gross profit on these - they accounted for 28% of its total gross profit in the first half of 2006.
The server microprocessor niche was the front that AMD chose when it decided to go head-to-head with Intel two years ago. It managed this quite up well up to the fourth quarter, and even took significant market share from its rival. AMD duly took the road north in the summer of 2005, reaching a high of $42 in January 2006, while Intel plummeted from $29 to a low of $16.75 in June 2006. Intel did not give in that easily and it soon counter attacked with its own range of new microprocessors and an aggressive cost-cutting campaign that had beaten AMD by the time the fourth quarter arrived.
Anxious not to lose its share of the market, AMD also had to cut prices, thereby triggering an increase of $100 million in fourth quarter sales, but a nosedive in its underlying profit. As a result, Bear Sterns drastically cut its earnings per share estimate for AMD to $0.08 from $0.25, with an even more painful cut for 2007 as whole - down to $0.41 from $1.19 before the AMD warning.
For its part, Intel is likely to post earnings per share of $0.25 on $9.45 billion sales in the fourth quarter. As regards guidance for the first quarter of 2007, the analyst consensus estimate stands at earnings per share of $0.23 and $8.94 billion in sales. Strong sales of server microprocessors and, of course, laptop processors, including the new range launched in 2006 by Apple, which was one of the big hits in the recent holiday season, are more than likely to compensate for weak sales of desk top microprocessors.
There are those who believe that the launch of Microsoft’s new version of Windows - Vista - which will be available to retail customers from January 30, could perhaps cause Intel to surprise the market with higher-than-expected guidance. But with or without Vista, Intel is Citigroup’s preferred chip stock for 2007.
Citigroup feels that the company’s restructuring, improved product mix, the launch of the new “Santa Rosa” laptop microprocessors in the second quarter, and the potential for a better price environment as the result of improved production capacity in the industry this year, are all likely to make Intel stock one to watch in 2007. Citigroup also thinks that the Credit Suisse’s aggressive downgrade for Intel to “Sell” at the beginning of the month will increase the element of surprise, once Intel proves that it is back on form.
One Israeli stock about which Citigroup has been slightly less enthusiastic is Saifun Semiconductors Ltd. (Nasdaq:SFUN). Yesterday, Citigroup analyst Craig Ellis published his latest coverage for Saifun in which he rated it “Hold” with a target price of $23, considerably higher than its current market price. Ellis believes that Saifun has no chance of signing any more licensing contracts this year with major manufacturers. What he actually means, as I see it, is that Saifun does not stand much chance of signing a deal with the likes of Samsung Electronics Co. Ltd. (KSX:5930) or Hynix Semiconductor (KSX:00660), but it may be able to sign an agreement with one of the other smaller manufacturers. Ellis does not expect the market to take an interest in the new NAND flash technologies that will eventually replace the MLC-based flash products until the end of the year.
Another case of an analyst downgrading his rating before he heard what the company had to say happened last Friday with Terayon Communication Systems Inc. (OTC BB: TERN.PK). Jefferies & Co. sent the stock crashing 16%, after its analysts downgraded it to “Neutral” from “Buy” on Thursday evening, and said that they did not expect that the company would be sold that quickly because of its lukewarm results up to September 2006.
Terayon then held its first conference call for some time on Friday evening and it had a few surprises in store. Its fourth quarter sales guidance of $18.6 million was 20% higher than Jeffries’ estimate. As the fourth quarter has been and gone, Jeffries will now have to take this figure as final and update their forecasts accordingly.
For me, the big surprise here was that this gap was due in its entirety to preliminary sales of around $3 million in the sexy field of television broadcasts over telephony networks - better known by the acronym IPTV. Asked to name the telephone companies which would be providing IPTV broadcasts on Terayon’s platform, the company’s managers replied, “The only name we can give you is that of our customer, Motorola Inc. (NYSE: MOT), and we can’t tell you who its customers are.”
The word on the market is that the IPTV customer in question is AT&T Inc. (NYSE: T). Judging from the tone of Terayon’s managers at the conference call, I would not be surprised if the company decides to hold off on a possible sale, since 2007 could be the year of the big breakthrough in home digital video broadcasts. As I understand it, Terayon will have what to offer if that comes to pass.
Published by Globes [online], Israel business news - www.globes.co.il - on January 16, 2007
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