Tech Sector Sees Boost from Strong Earnings Results

Strategic Insights -

Fears of a slowdown in global PC sales, sparked by Japan's earthquake, have started to dissipate after tech heavyweights Intel Corp and VMware Inc reported stronger than expected earnings. The results, which also saw IBM Corp blow past Wall Street targets, have raised hopes that the battered US tech sector is recovering from recent losses. Fund managers, who had sold down sector bellwethers fearing damage to margins from Japan, are piling back into shares of Intel, VMware, and possibly oversold stocks.

Key Takeaways:

  • Intel Corp's revenue forecasts for this quarter shattered expectations, defying fears of a slowdown in global PC sales, and its shares climbed 4%.
  • VMware Inc surprised Wall Street with evidence of a surge in corporations upgrading equipment as they emerged from recession, and its shares surged 10%.
  • IBM Corp blew past Wall Street targets, raising its profit forecast and citing strong sales of mainframe computers and brisk business in emerging markets.
  • Concerns that the growing popularity of Apple's iPad is hurting personal computer sales were a major contributor to the tech sector's decline, but Intel's results suggest the market may not be as badly affected as expected.
  • Intel's stock has shed about 12% of its value since the first iPad hit store shelves in April last year, but some analysts say the shares have become a bargain despite its problems.
  • VMware, which specializes in helping corporations set up virtual computer hardware and software networks, beat Wall Street earnings estimates for the first quarter and indicated its margins would grow this year.
  • Shares of major players such as Dell Inc, Cisco, and Hewlett-Packard present attractive bargains despite uncertainty about how much the sector will be affected by Japan over the next few months.
  • Intel remains far behind Britain's ARM Holdings in designing mobile processors, but the jury is still out on the longer term prospects of the PC market despite Intel's strong results.
  • The gradual shift of manufacturing toward less-visible China from Taiwan and Japan may have clouded the picture somewhat, and the issues are still not resolved unless Intel gets design wins on Tier 1 handsets.

Statistics:

  • Intel Corp's shares have shed about 12% of their value since the first iPad hit store shelves in April last year.
  • The Standard & Poor's 500 Index has gained 11% over the same period.
  • Intel's stock is trading at about 9.5 times expected annual earnings, making it a bargain despite its problems, according to some analysts.
  • VMware's shares have doubled in value last year but came down to earth 3 months ago as VMware said it would focus on internal investments in 2011.
  • Dell Inc, Cisco, and Hewlett-Packard trade around 10 times forward earnings versus the market's 13.5 average.
  • Apple trades at 13 times forward earnings, making it a bargain despite gaining about 37% over the past 12 months.

Sources:

  • I Media LLC 2011
  • Solaris Asset Management
  • Gartner
  • Wasatch-1st Watch Income Equity Fund
  • Roth Capital Partners
  • Albawaba.com