Saturday, August 28, 2010

Tech update for the week $CSCO $NTAP $HPQ $INTC

Tech update for the week
· Newsflow was pretty quiet for most of the week, as we are in between earnings and the
start of the fall sell-side conference season and mid-Q updates. However, the INTC
preannouncement Fri morning (which convieniently came 1 min before the Fed) provided
one of the most important data points in weeks. Sentiment continues to deteriorate towards
the group - tech underperformed again this week and for the month of Aug, is lagging the
sp500 by nearly 500bp. The poor Asia sales trends from Jul that were reported at the start of
Aug, combined w/the downbeat CSCO conf call of a few weeks ago, continue to weigh on
the space. The sell-side has become pretty negative on tech overall, directing most of their
concern towards the PC space (there have been signs of softness in the consumer PC market,
something that Dell and HP mentioned on their recent earnings calls, although corporate
spending seems like it remains on track). INTC’s preannouncement also cited consumer PC
softness. The tone from most mgmt teams continues to sound better than current St sentiment
(reviewing all the earnings calls from the Jul-end companies, inc. CSCO, ADI, NTAP, HPQ,
DELL, MRVL, etc, signals that trends aren't too bad) and the takeaways from this week's
Morgan Stanley semi conf in Chicago were relatively sanguine. That said, the St remains
very cautious (and many know that the CQ3 will be back-end loaded, w/the month of Sept
key). The one bright spot for tech has been a pretty large uptick in M&A activity, esp in
software. SY/SAP and MFE/INTC have been the highlights, but there have been a handful of
smaller deals too (the latest being the WSJ report on Thurs afternoon talking about ARST
being for sale). The DELL/HPQ bidding war from PAR continues to heat up also.

INTC – what was shaping up to be a quiet week was disrupted on Fri w/INTC’s profit
warning. The miss itself prob. wasn’t too surprising as the sell-side had been pretty cautious
towards the name for a few weeks now and a bunch of firms had brought numbers down.
The ~5% top line cut and 100bp GM reduction weren’t disasters and the stock (along w/tech
in general) traded OK in the wake of the announcement. However, the profits update comes
pretty early in the Q (there is more than 1 month left) and now provides cover for the rest of
the industry to adopt a more cautious tone. There will prob. be a bunch of sell-side number
reductions for the group, which could put a lid on the space. The next critical update will be
NVLS on this Thurs and the Citi conf Sept 7-8.

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