Paul, Intel investors, Michael Murphy found something positive in the CC this week:
Even the Intel (NASDAQ: INTC ) call wasn’t that bad. I was on the call and, of course, they were sorry to announce what they did. We’d all been expecting revenues to be down about 15% for the March quarter from the December quarter from
the seasonal stuff plus some more of the inventory adjustments. But they announced that they’ll be down 25%, which is
obviously a much bigger hit.
And here’s the problem: I found the inventory numbers and PC manufacturers had eight weeks’ worth of inventory in
January—they normally carry two weeks. So there was eight weeks’ worth in January. They’re now down to three weeks’
worth of inventory. So in five weeks, they’ve burned off five weeks’ worth of inventory. Basically, they haven’t bought
anything for five weeks. So, not surprisingly, Intel’s revenues will be down sharply.
But the good news of this is that if they’re down to three weeks and two weeks is normal, then there’s only one more week to go. They’re not going to go to zero and they’re not going to go out of business, so we could be very close to an upturn
here.
This is Michael Murphy with the Technology Investing hotline updated for the weekend of March 10, 2001.
Well we had, obviously, not a good week. It started off very well, very strongly. But then we got just an absolute NASDAQ
plunge at the end of the week on the Intel (NASDAQ: INTC ) news, which I’ll talk about in a minute. We were down 5.3% on
the day and this was the sixth straight down week. It completely wiped out the rally from Monday through Wednesday.
There were really two separate problems going on on Friday and I think they’re symptomatic of what’s going on in the
market. The first was earnings worries. Intel, of course, came out and said that the weakness they’ve been seeing in PCs
is now spreading geographically to Europe. And also they thought it was spreading across industries to the
telecommunications industry. They sell a lot, for example, to the cell phone industry.
But they said specifically that they still look for an upturn in the second half unless the economy gets much worse. But for
most of the analysts on the call, that was all they needed to hear. They just gave up on the second half upturn completely.
And, in fact, Cisco Systems (NASDAQ: CSCO ) came out Friday and said that they’re going to have some job cuts by
attrition. And they said that it looked to them like this downturn could extend beyond just the two quarters they were thinking
and that maybe it was hitting the rest of the world. So, that took the market down for anybody who is worried about
earnings.
Then we also got the jobs report on Friday and unemployment was flat at 4.2%. But the number of new jobs was quite a bit
more than I thought it would be. I think anybody else would agree. The consensus estimate was 75,000. I was a little higher
than that, but we came in at 135,000. So then people thought that maybe this means that the economy is stronger than we
thought and that maybe this means that the Fed won’t cut interest rates.
So now they’re worried both about earnings and that maybe the Fed won’t cut interest rates. And down goes the market.
Now this obviously is cognitive dissonance. That’s the ability to hold two opposite thoughts in your mind at the same time.
If the economy is stronger than we think, then there’s no reason in the world to push the technology upturn out from the
second half of this year to 2002. But they did both together on Friday and it just doesn’t matter what logic tells you because
psychology is running this market.
And the psychology is very time dependent. If people are looking short-term, if they’re looking at March and June quarter
earnings, or listening to what Intel says, they knock stocks down. When, earlier in the week on Monday through
Wednesday, they were looking longer term, looking at what might improve in the second half of this year, looking at
valuations relative to sales/earnings book value, then they get very enthusiastic.
I think it’s quite true that next week we do need to get back to 2100 pretty quickly to avoid a final washout here that would
just take the market down sharply and then bring it back up. So I’m remaining fully invested. The NASDAQ market peak
last year was on March 10, 2000, so it’s the one-year anniversary. The market is down 59%. It’s been a very, very tough
year, obviously.
But, remember that a year like this sets us up for several up years in a row. And, in fact, I’ve been monitoring the mutual
fund inflows. We had big $15 billion inflows this week in a couple of days. Many people are starting to take money out of
money market funds and are putting them into mutual funds wanting to pick up stocks at these prices.
Let me talk a bit about our core stocks first because actually the news is not all bad there.
For example, AOL Time Warner (NYSE: AOL ) was at the Merrill Lynch internet conference and said that they’ve now
topped 28 million subscribers. And then they specifically said that they have absolutely no change in their outlook for year
2001 revenues and earnings. They were responding, of course, to the Yahoo! bad news earlier in the week that Yahoo! is
going to have a very substantial miss in the first quarter due to lack of advertising. But America Online also has
subscriptions, they also have content sales, they also sell products—they just have a better business model.
The details on the Cisco Systems (NASDAQ: CSCO ) cut are that they’re going to cut about 5% to 10% of the work force
by attrition (3,000 to 5,000 people). They’re cutting 3,000 temporary workers. They’re cutting their travel budget 60%.
They’re just trying to protect their bottom line. They do have a July fiscal year, so they are going to try to get this done by
then. They’ll take a one-time charge in the fourth quarter to cover any costs of it (probably $300 to $400 million).
Earlier in the week, though, Cisco’s vice president of optical networking said that orders have started picking up in recent
weeks and that business is getting better. And one of the VPs in Latin America said that it looks like they’ll be up 80% this
year in that geography to $1 billion. So, it’s not all doom and gloom.
Even the Intel (NASDAQ: INTC ) call wasn’t that bad. I was on the call and, of course, they were sorry to announce what
they did. We’d all been expecting revenues to be down about 15% for the March quarter from the December quarter from
the seasonal stuff plus some more of the inventory adjustments. But they announced that they’ll be down 25%, which is
obviously a much bigger hit.
And here’s the problem: I found the inventory numbers and PC manufacturers had eight weeks’ worth of inventory in
January—they normally carry two weeks. So there was eight weeks’ worth in January. They’re now down to three weeks’
worth of inventory. So in five weeks, they’ve burned off five weeks’ worth of inventory. Basically, they haven’t bought
anything for five weeks. So, not surprisingly, Intel’s revenues will be down sharply.
But the good news of this is that if they’re down to three weeks and two weeks is normal, then there’s only one more week
to go. They’re not going to go to zero and they’re not going to go out of business, so we could be very close to an upturn
here.
Intel, in any case, is going to cut 5,000 jobs over the next three quarters by attrition. This should be easy for them to
do—no reserves needed. They’re essentially maintaining their R&D budget at $4.2 billion. It was going to be $4.3 billion,
so they took it down a tiny bit. Capital spending is still $7.5 billion. They specifically said that to refute John Joseph at
Solomon Smith Barney who keeps saying that they’re going to have to cut.
But the tone of the call, even though it wasn’t horrible, still left the stock down 11.5% on Friday, under $30 per share. This
is obviously awfully cheap. The Semiconductor Industry Association numbers came out and January sales were up 13.7%
year over year. So, we’re still seeing growth. They were sequentially down, of course, for the seasonality, but year over
year, we’re still up. And the SIA also said, incidentally, that this is an inventory adjustment and that it will be completed by
the end of the third quarter. I think it will be completed faster than that, for example. I think those PC numbers tell you more
of what’s really going to be happening here.
Earlier in the week, JDS Uniphase (NASDAQ: JDSU ) also came out and guided people down. They revised their outlook
down again and the stock was down only about $1. It was not a big deal. They said that they’d earn about $0.14 per share
this quarter instead of $0.17 to about $925 million. So ABN-AMRO cut the price target from $78 all the way down to $45.
Warberg cut from $60 all the way down to $48, but we’re looking at a $26 stock. $26 to $45 or $26 to $48—those aren’t
bad numbers.
Finally, on Microsoft (NASDAQ: MSFT ), which was also at the Merrill Lynch internet conference, Henry Blodgett, who is
the magazine reporter that Merrill Lynch hired to follow internet stocks, had a real disaster there. He’s now responsible for
Microsoft talking about having to cut their numbers because obviously if Intel’s having a problem, Microsoft will too.
Microsoft came out specifically trying to refute him and said there’s no change in their financial guidance in either
revenues or earnings. Again, not that it did them a whole lot of good in the PC sell- off—it was down 2-9/16 on Friday. But,
there you are.
Just a few comments on some of the other companies:
BMC Software (NASDAQ: BMCS ) on March 13, will be replaced by Novellus Systems in what’s called the QQQ. It’s the
New York Stock Exchange listed closed-end fund for the NASDAQ 100 (the NASDAQ 100 tracking stock) and they’re
going to replace BMC with Novellus. So, it’s possible that there will be a one-day hit to BMC. I don’t think so, but it could
be. Incidentally, the vice president of the company came out and said they are quite optimistic early here in March going
into the quarter. They just don’t see the weakness that Oracle saw. This is another data point that tells you that things aren’t
so bad.
Biogen (NASDAQ: BGEN ) got downgraded by UBS Warberg from a “buy” to a “hold.” It was kind of obtuse reasoning, I
think. Avonex is going to lose its orphan drug status in 2003, which we all knew. So they’re worried about that, so then they
cut their 2002 estimate from $2.43 down to $2.11. They made no change to the 2001 estimate, and then they downgraded
the stock. So I think maybe they’re just looking for reasons.
Last Sunday, incidentally, after I updated the hotline, Biogen did present that psoriasis data at the American Association
of Dermatologists meeting. And it was quite good. It was the Phase II re-treatment trial and it turned out that Avonex
continues to work in people who are being re-treated. In fact, they got an even better response than they did the first time
around. It’s good stuff.
Chiron (NASDAQ: CHIR ) licensed a non-exclusive license for their Hepatitis-C vaccine to Japan Tobacco. This is a
Hepatitis-C target in the human genome.
With Dell Computer (NASDAQ: DELL ), of course the stock was very strong earlier in the week. It did get hit by the Intel
news, but I think it will be a pretty quick rebound. I think that PC box-makers news means that they’ve got control of their
business. They ran their inventories down quickly—they got rid of them. And we’re going to see a PC pickup in the second
half.
EMC Corp. (NYSE: EMC ) got downgraded by both Wit SoundView and Solomon Smith Barney. Of course, they’ve
already guided lower. Wit went from a “strong buy” to a “buy”; Solomon from a “buy” to an “outperformed.” I think the
market affected the stock much more, actually, than those two downgrades.
GlaxoSmithKline (NYSE: GSK ) made an investment in a company called Golden Helix. It’s very interesting because they
have this HelixTree software which allows you to figure out the multiples for diseases that are caused by multiple genes
(which genes are being turned on). GSK actually co-developed this with Golden Helix—they supported the work. And it’s
probably the most sophisticated software out there to use with all those human genome sciences genes that they’ve got.
So that was kind of interesting.
LSI Logic (NYSE: LSI ) was downgraded by Lehman. The company announced that the first quarter would be below
expectations. Sequential revenues are down 30% and they’re only going to make $0.03 per share instead of $0.21 per
share. But they said this on Monday and the stock went up after they said it. By the end of the week it was going down, but
it was interesting that it went up. They said that they would reduce inventories again, but they also added that the US
end-user business is slowing. That’s the first time they’ve actually said that.
Morgan Stanley and Lehman downgraded Nokia (NASDAQ: NOK ) from a “buy” to a “market perform.” They’re just
worried that the weakness is going to hit the cell phone business even though Nokia says that there’s no slowdown. In fact,
by the end of the week, Morgan put out a thing saying maybe there wouldn’t be a slowdown.
Motorola (NYSE: MOT ) got hit by the same thing. Merrill Lynch downgraded Motorola from a “long term buy” to a “long
term accumulate.” Incidentally, Motorola said that they’ve been selling stock into some of these cellular systems that they
finance (that use their equipment) and they’re going to get $1 billion in the first quarter from successful stock sales and
mergers (people taking stuff over).
Peoplesoft (NASDAQ: PSFT ), of course, got hit with Oracle. The company says that they will make their numbers no
problem.
Sun Microsystems (NASDAQ: SUNW ) is going to introduce— this is hot news—on March 21, the new generation of their
server: the Ultra Spark III. And there are a lot of rumors on Wall Street that this is going to be delayed. The rumors are
wrong. They are going to introduce it on March 21, and it’s going to make the stock go up.
Taiwan Semiconductor (NYSE: TSM ) turned on the first production line in the whole world that those mixed signals 0.13
micron—that’s analog and digital chips— they’re actually making them for Broadcom. They said that their February sales
were down 28% from January. They said they thought the first quarter would be down 26% overall. Previously, they had
told me 25%. So they’ve added a percent. I don’t think it’s a big deal.
And Texas Instruments (NYSE: TXN ) got hit also on the Nokia news since Texas Instruments is a big supplier to Nokia.
But if Nokia actually makes their quarter, as they have been quietly telling everybody they will, there are several stocks
here including Intel and Texas Instruments that should come up.
Thanks for calling. We’ll be updating again next weekend or if the NASDAQ 100 moves more than 100 points or the Dow
Jones Average more than 250 points up or down—let’s hope it’s up—before then |
