Quick Thoughts: The Week That Was in TMT

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The announcements just keep coming in the mobile device market.  First, Apple missed a quarter for the first time in 9 years.  Most analysts are taking the news as an idiosyncratic blip, taking comfort in management’s unusually confident guidance for the Holiday quarter and the global run on the just introduced iPhone 4S.  In one sense, these analysts are correct and the weak sales of the soon to be surpassed iPhone 4 should have been anticipated, but weren’t.  In our view, the real long term investment controversy over Apple is whether or not they can establish iOS/iCloud as a one-stop internet services platform.  If so, the revenue potential of streaming media, e-commerce, advertising and payments could make worries over near term device sales irrelevant.  As such, I see Apple as a cornerstone of the new TMT sector foundation.

Nonetheless, the rare miss from Apple does raise some minor concerns for investors.  In the first four years of iPhones, product cycles didn’t really matter because the overall growth rate was so strong.  It seems that this is no longer the case, and given 12-15 month refreshment cycles for major products, Apple performance could be far more volatile going forward.  Already new smartphones from Samsung (Galaxy Nexus) and Motorola (Droid RAZR) are moving the bar forward, with specifications that exceed the just released iPhone 4S in certain regards.  While the 4S is an impressive device, with clear advantages, and is selling at a feverish pace, as it ages and as rivals bring out ever more clever alternatives, the next product transition for Apple could be even more awkward, so be careful out there.

Jumping back to Google, the latest Android iteration – code named Ice Cream Sandwich – was released last night in a joint presentation with Samsung, which will premiere the software with its Galaxy Nexus smartphone due November 10 at Verizon and other carriers worldwide.  This iteration of Android cleans up clumsy elements of previous releases and creates a more cohesive and intuitive mode of user engagement across the platform, making the whole thing easier to use and more efficient.  The device itself boasts gaudy specifications, starting with the curved 4.65” 1080×720 Super AMOLED display, and finishing with a laundry list of bells and whistles, including NFC for mobile payments and a built in barometer.  Earlier in the day, Motorola announced its flagship Droid RAZR, so named for its 7.1mm thickness harking back to the halcyon days of 2005 when the original RAZR held nearly 25% world cell phone market share.  These devices are emblematic of the strength of the Android ecosystem, where a coterie of the world’s best consumer electronics players push their collective hardware skills and R&D budgets in service of Google’s global platform penetration objectives.  It is this firepower that leaves me confident in Android and cognizant that iPhone product cycles may be more pronounced in the future.

Of course, absent the complication of expectations, both Apple and Google delivered extraordinary quarters.  Apple grew overall sales by nearly 40% and EPS by more than 50% YoY.  Google revenues were up more than 33% vs. a year ago and earnings rose 26%.  Adjusting for cash, the forward P/Es for both companies remain modestly in the mid-teens, yielding PEG ratios of well more than 2.  Given the prodigious opportunities in front of both companies and their obvious success in capitalizing on them, I am inclined to look past a bit of quarterly volatility.

At the same time as the Apple fireworks, Intel was posting a solid quarterly beat vs. cautious market expectations.  Adjusting for acquisitions, sales were up nearly 19% YoY, with surprising strength in the PC client segment offsetting continued weakness in the mobile market.  While PC bulls will see this as prima facie evidence that the looming threat of PC decline has been greatly exaggerated, I would replace greatly with slightly.  There are many possible reasons for strong Intel client processor shipments this quarter, and only a few of these suggest sustained growth in demand for the x86 platform.  Easy compares, share gain, and channel fill may have played a much bigger role.  I need more than one quarter to get on the bandwagon, particularly given the poor results from the Atom platform.

Last week, IBM was the big name reporting and it posted a mild disappointment with sales growth of just 2.8% at constant currency.  At this point, IBM is likely to be driven by macro economic sentiment rather than its own business specifics, and given that we see IBM’s core businesses as largely orthogonal to most of the tectonic shifts underway in the larger tech industry, this is likely appropriate.  With a forward P/E higher than Apple, despite top line growth less than a tenth as fast, it is difficult to get overly excited by IBM shares.

Next up: Microsoft on Thursday night.

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