Quick Thoughts: Google, Intel, Microsoft and IBM

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–       Google miss may portend general economic weakness, but long term position is still extremely attractive

–       Strong Intel sales curious given PC weakness reported by others, we’re still skeptical long term

–       Microsoft gets strength from Xbox, beats despite weak PC biz, positioned for a play for the consumer market

–       IBM is IBM, playing both sides of the game and winning on execution

Four tech bellwethers reported, three beats and one miss.  Google delivered sales growth of 25%, obviously strong but disappointing relative to 33% YoY growth in the previous quarter and expectations that the company would deliver more of the same.  While reasons abound for the shortfall – exposure to Europe, currency issues, a drop in click-through ad pricing – the concern is that the biggest issue is a softening advertising market that could portend weakness in the broader economy.  Meanwhile, profits grew just 7% in the quarter after a 26% jump in Q3, as expenses outgrew revenues by more than 1000bp.  The naysayers will see these results as prima facie evidence of Google’s inability to monetize its prodigious investments and project a further downward spiral in 2012.  The believers will shrug off the quarter as hanging on short term market conditions and anticipate long-term payoff for the company’s aggressive strategy.

We are inclined to remain with the believers.  Google’s long-term objectives – e.g. greatly expanding its share of the $1.5 Trillion global advertising market and establishing beachheads in e-commerce, mobile payments, streaming media, amongst other huge and lucrative markets – are grand and achievable, and one quarter, particularly one that still delivers 25% growth against a tough compare in a difficult global economy, is not enough to establish a different trajectory.

In contrast, Intel turned in an excellent quarter of its own, with similar sales growth (+21% YoY) and and EPS growth (+7% YoY) to Google with a significantly smaller PE.  We have been critical of Intel’s long term position against a market that we believe will turn sharply toward mobile platforms.  We have also been skeptical of forecasts for continued growth in the PC market dominated by Intel’s x86 platform and a cash cow for the company.  In Q4, chips for client PCs jumped 17% in the face of concerns that disk drive shortages due to flooding in Thailand would disrupt demand.  Apparently not – although concerns remain of inventory corrections in 1H12.  Despite the strong results, we are not enthusiastic about Intel’s positioning for the future.  Overall PC market forecasts continue to be adjusted downward, progress by Intel in the tablet market is spotty, and opportunities exist for ARM based architectures to make incursions into the lucrative server market.

Microsoft’s beat came against fairly tepid expectations.  Sales for the quarter were up 5% and profits were up 1%.  Notably, Windows sales were weak, down 6% YoY, seemingly counter to Intel’s robust client PC chip sales and probably a cleaner take on actual PC demand for the quarter without share shifts or inventory levels to account for.  The big upside came from Xbox, which is intriguing.  We believe Microsoft has the potential to integrate its mobile and consumer businesses to establish itself as a credible alternative to the Apple and Google hegemony.  Xbox is an important but unsung weapon in this, as offers an end-run onto the living room TV for tens of millions of households.  Content deals cut for Xbox could extended and integrated for Windows Phone and Windows 8 devices.  We are cautiously optimistic at the chances.

IBM saw sales up just 2%, slightly missing expectations, but blew past earnings estimates and posted 11% growth in operating income on improved efficiency, continued shifts to higher margin software and services and share buybacks.  We are skeptical that the strong enterprise data center investment cycle will keep its pace in 2012, and believe that a long-term shift to the public cloud will propagate hardware commoditization and open source competition in software.  IBM will feel these changes, but has also positioned itself as a leading cloud host and IT consultant, businesses that will thrive even as its more traditional offerings are under threat.

For our full research notes, please visit our published research site.

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