After watching the NDX futes tuesday night, i was sure we'd be above QQQ 27 today, but it looks like the rest of the market pulled the Nazz down. It's is possible that the news from Intel was not as possitive as traders thought last night.
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Paul Kedrosky
Tech Bulls Building Castles in the Air
By Paul Kedrosky
Special to RealMoney.com
04/16/2003 12:02 PM EDT
URL: thestreet.com
It's time to dig out after Technology Tuesday, with Microsoft (MSFT:Nasdaq - news - commentary) , Intel (INTC:Nasdaq - news - commentary) , Motorola (MOT:NYSE - news - commentary) and Texas Instruments (TXN:Nasdaq - news - commentary) all reporting last night. What do we know now that we didn't know before?
Marginally negative results at Microsoft counterbalanced marginally positive results at Intel, with Motorola and Texas Instruments riding the middle rail. There really wasn't much "there" there, but that won't prevent people from using these results for whatever purposes best suit their fancy.
Chips Still Down for Intel
Bulls, for example, will point to Intel's improved gross margins. After all, in the face of nasty competition with Advanced Micro Devices (AMD:NYSE - news - commentary) , it managed to expand its margins a full percentage point to 52% -- no mean feat.
Fair enough, but the bears have an easy rejoinder. The margin gains were one-time, as Intel CFO Andy Bryant cheerfully conceded on the call. They came from selling restricted inventory, as well as some lower-than-expected product start-up costs.
But Intel bulls aren't done yet. They also point to the company's positive guidance for the upcoming second quarter. While it is usually down 5% to 6% seasonally, Intel guided (in fairly confusing fashion) to more like flat to down 1%.
The reason for the company's optimism? Here's CFO Bryant: "Does it feel like a recovery? No, but it feels modestly better." He concluded by saying he felt "more confident." And that confused comment emboldened the bulls.
Should it have? I don't think so. Intel is still wiggling around, delivering no growth while fishing expensively (and in an error-prone fashion, as its mispriced flash foray is showing) for new markets that will add the requisite 15% per year to its revenue. Microsoft CFO John Connors put the issue neatly in last night's call: "As I often remind myself and others, in order to grow a $32 billion business, you first have to get $32 billion in business." Indeed you do.
Shaky Times for Mister Softee
So how about Microsoft then? Was the mighty giant able to say something that had more meaning for the turn in technology? About the best that can be said for Microsoft is that it wasn't as bad as some had worried. Somehow it got out in the wilds of the markets Tuesday that Microsoft was going to miss markedly. Given Microsoft's ability to mess with unearned revenue, a big miss was about as likely as large same-day meteor strike -- very small indeed. And Microsoft beat its numbers, so the point goes to the bulls.
Once again, however, the bears have an easy comeback: Microsoft gave a shaky sales forecast, guiding down slightly for next quarter. It also pointed to continuing weakness among corporate customers and suggested that Microsoft's main markets weren't likely to see any meaningful growth until sometime in 2004. Corporations just weren't coming out in force, and Microsoft seemed more than a little puzzled about when that might change.
So with these largely neutral results the order of the day, what had bulls partying so hearty in the aftermarket? The basic (if silly) answer: It wasn't as bad as expected. Sure, Microsoft, Intel, Motorola and Texas Instruments all delivered tepid results, but it could have been a lot worse. After all, there was the war as an outlier event, and now the rise of SARS is messing up travel and supply chains.
End of Small Recovery?
Bulls are right. The quarter could -- and perhaps should -- have been much worse than it was. That it wasn't speaks volumes about the resilient mini-recovery in technology that has been under way for a few months now.
Will it continue? Honestly, I think not. Tonight's results represent the end of the fundamentals-driven part of the mini-rally. Continuing the stock part of the rally further will represent, as Oscar Wilde once said about a man's second marriage, the triumph of hope over experience. After all, technology bulls can't believe the current mini-recovery is over already, and they're perfectly happy to tie a few techs to the bumpers of their cars if that will perk them up a little.
Trouble is, that sort of thing rarely perks anyone up -- and it won't do anything for technology. While there is immense impatience for a new bull run in Microsoft, Intel, Texas Instruments and the rest, there was nothing in last night's calls to make anyone think that we can't limp along the bottom for some time longer.
Does that mean the current rally should be sold? Not at all. It actually wouldn't surprise me to see it run a little, even if only for a day or two. But the truth is that technology bulls are building a castle in the air: There's no foundation for the current run, and nervous investors will soon find themselves teetering on the ramparts and thinking better of it.
So, after Tech Tuesday, what do know now that we didn't know before? Only that bulls are as eager as ever for techs to run, that managers in technology are underestimating the impact of SARS (despite their colossal dependence on Southeast Asia) and that the recovery in the tech sector looks to be receding concomitantly.
We're back to playing that "it will be better in the second half" game again, and it is one that has ended badly for three years running.
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Paul Kedrosky advises various hedge funds and private equity firms in the U.S. and Europe and serves as an adjunct professor at the University of California in San Diego. Formerly a high-ranked sell-side technology equity analyst, Kedrosky has also started various technology companies and worked in product management at Digital Equipment Corp. At time of publication, Kedrosky held no positions in any of the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Kedrosky cannot provide investment advice or recommendations, he welcomes your feedback. |
