I am so worried about what’s happening to U.S. tech stocks I’m jumping on a plane to Asia.
I take off this coming Saturday, with one single mission in mind: To find companies — mostly in the wireless industry — that are still growing like crazy and still selling at screaming bargains.
Heck, finding them here has been like looking for a needle in a haystack.
And that’s especially true now that THE two biggest tech names in the U.S. — Intel and Google — flat out admitted last week that business is turning sour or downright rotten.
I’ll tell you about some of the Asian companies I’ll be visiting in just a minute. But first look at what’s happening here:
Intel: A Serial Disappointer!
Hits New 52-Week Low!
Intel coughed up a huge hairball — again.
Intel now expects to pull in $8.7 billion to $9.1 billion of sales this quarter. The midpoint of that range is $500 million less than the midpoint of Intel’s previous Q1 forecast of $9.1 billion to $9.7 billion. It’s also $500 million less than the $9.4 billion the Wall Street crowd was counting on.
That’s a lot of dough!
More importantly, Intel is now a serial disappointer. Remember: The fourth quarter of 2005 was also big letdown. Their 40 cents of profits on $10.2 billion of sales was well short of the 43 cents on $10.56 billion of sales that Wall Street was expecting.
Intel didn’t pin down exactly what the cause was — weak demand or loss of market share. But it did admit it saw a “slight†market share loss to rivals. What they’re really talking about, though, was just one rival — AMD.
Bottom line: Intel now operates in one of the most intensely competitive industries in the world. And competitors are doing a lot more than just nipping at Intel’s heels — they’re eating its lunch.
The company is in a major bind: It still has to make multi-billion dollar investments in new plants. But, at the same time, it’s already operating in a marketplace where the pay-off on that huge investment is as reliable as the ups and downs in its demand … in other words, not reliable at all.
If Intel sinks a couple billion dollars into a chip plant, then demand drops, it can’t operate that plant at a high utilization rate.
Result: Its profits can get hammered.
And right now, that’s exactly what I see happening. Indeed, Intel says it “expects the first-quarter gross margin percentage to be adversely impacted by the change in revenue. Expenses (R&D plus MG&A) are expected to be lower than previously forecast due to lower revenue- and profit-related spending.â€
Don’t let the importance of this statement pass you by. Intel is flat-out saying that its profit will be shrinking. Heck, CEO Paul Otellini even admitted back in January that 2006 business was starting off “in a bit more of a hole … than we had originally thought.â€
Hint: When a CEO tells you business is good, you have every right to be skeptical. But when he says it isn’t so good, you’d better believe him.
I’ve Warned about This Before.
If You Didn’t Hear Me Then,
Please Be Sure to Listen Now.
On October 18, 2005, I wrote:
“First, if you own Intel, sell. That’s regardless of Intel’s numbers tonight. If their numbers kick off a mini-rally, grab the chance to sell at a higher price. If the numbers are a disappointment, hurry up and sell before it falls even further.
“Second, if you own other technology stocks, watch out. Intel could lead nearly the entire sector down.
“Third, I say ‘nearly’ because there will still be some exceptions, and AMD could be one of them. AMD’s share price is up 51% since May … while Intel’s has gone nowhere; up a meager 1% in the same period.
“But there IS a good bet here for investors who have some spare money to play with: You can buy put options in Intel, and you can buy call options in AMD. I wouldn’t necessarily buy them at exactly the same time. Rather, when the tech sector rallies — that’s the better time to buy the Intel puts; and when the sector falls, it’s the better time to buy the AMD calls.â€
And again on December 27, 2005, I wrote …
“Good [bet]: Advanced Micro Devices (NYSE:AMD)
Better [bet]: Intel put optionsâ€
AMD closed at $21.05 on October 18 and is now floating around the $40 range … which means that anybody who followed my suggestion would be sitting on close to a 100% gain.
Meanwhile, Intel closed at $23.72 on October 18, and depending upon what type of put options you bought at the time, your gains could have been several times better.
I am very convinced that AMD is still headed higher and that Intel has a long ways yet to fall.
Google Shock
Don’t think for a minute that Intel is the only U.S. tech company suffering from top-line blues. Just look at Google, which shocked Wall Street with a new warning last week.
CFO George Reyes warned last Tuesday that Google isn’t anywhere near the growth juggernaut Wall Street thinks it is. His words are actually quite blunt:
“Clearly our growth rates are slowing. We see that each and every quarter.â€
That isn’t the first Google warning sign either. Back in late January, Google reported disappointing Q4 results, and its shares tumbled by 19% on the news.
Now, Wall Street is finally waking up the fact that the shares may be greatly overvalued. And sure enough, Google just got hit again yesterday — down another 10.18 points.
My view: Expect more of the same. And even if I’m wrong, it’s way too late to buy.
And if both Intel and Google are suffering from sales shortfalls, you’d better believe that they aren’t the only U.S. tech companies ready to cough up profit hairballs. That’s why …
I’m Going to Asia to Find the
Next Generation of Winners
Last week, I pointed out which companies I believe are among the most likely wireless losers:
- American Tower (NYSE:AMT)
- AT&T (NYSE:T) and BellSouth (NYSE:BLS), despite the merger hoopla!
- Crown Castle International (NYSE:CCI),
- SBA Communications (Nasdaq:SBAC).
- Sprint Nextel (NYSE:S)
- T-Mobile Deutsche Telecom (NYSE:DT)
- Verizon (NYSE:VZ)
This week, I introduce you to a few that should be among the big wireless winners, and all them are based in Asia.
The First Set of Winners:
Leaders in “Near Field Communicationâ€
Near Field Communication (NFC) is a well established technology that’s about to change the way we use our cell phones.
The technology is actually quite simple: It uses encrypted radio frequency. And it does so over very short ranges.
The goal: To connect wireless devices with electronic devices. PCs. A cell phone. Other consumer electronics.
Consider this application:
We go to a university campus. Could be anywhere in the world: Ohio State, Harvard, Cambridge or your local community college. You want to register for classes. So you just enter the choice in your cell phone. Then you hold it up to a registration terminal, press a button and you’re done.
You can use the same cell phone to open locked doors on campus … pay for your food at the cafeteria … buy books and supplies at the campus bookstore … get a drink from a vending machine … and qualify for special student discounts at local movie theaters, restaurants, and shops.
Is this dream application still far away? Not at all! At one campus I hope to visit on my trip to Asia, it’s already alive and kicking.
But Near Field Communication is more than a great technology. I believe it will be one of the biggest investment opportunities of the decade.
I haven’t picked out the companies yet. I’ll do that when I’m back from Asia.
But one company I’m looking at, NTT DoCoMo, is light years ahead of the rest of the wireless world.
It sells for approximately 15 times earnings, has a low 23% debt-to-equity ratio, pays close to a 2% dividend, and has recently dropped a bit in price to a level that could be pretty attractive.
Another you should watch is actually a US-based player, Vivotech. It’s developed software for wireless electronic payment services. And it has hardware that uses Near Field Communication for credit cards, access cards and infrared cell phones.
Vivotech isn’t yet publicly traded yet. But it’s expected to float its IPO sometime this year. We can talk more about it when we get a bit closer.
Winner #2
Taiwan-Based
Wireless Virus Fighter
All those wireless signals bouncing around the airwaves have to be captured.
One Taiwan-based company I’ll be visiting next week does just that. It makes all the connectivity products — hubs, switches, adapters, print servers, routers, and transceivers — that connect wireless devices. It’s a kingpin in the wireless connectivity world.
But I think the truly big opportunity this Taiwan company is providing is Internet security for wireless Internet surfers. The last thing you want is someone piggy-backing on your WiFi connection. Not only are they getting a free ride off your paid-for air space, but they also can take all your data and personal information.
This company’s newest product is a 3-in-1 Internet security system for home networks. It protects you against (1) spam, (2) pop-up advertisements, and (3) viruses.
It’s an amazingly easy-to-use piece of hardware that consolidates the whole works — firewall, antivirus, intrusion detection, content filtering, pop-up and spyware killer into one small, plug-and-play device. Best of all, it automatically loads the latest virus and spyware updates and spam server lists to your computer for you.
Winner #3
Creative Technology — the iPod Killer.
When you think of new wireless applications, most investors think of cell phones. However, music and video applications are truly where one of the next big opportunities will be. And for proof, you don’t have to look any further than Apple’s iPod.
The company I’m looking at has built a far better mousetrap — especially for video. This iPod competitor has a much brighter screen, longer battery life, a voice recorder, an FM radio, holds many more songs, thousands of pictures, supports a wide range of audio and video formats, and works with multiple online song sellers. Bottom line: Apple’s great success is inviting an army of imitators and it’s only a matter of time before somebody pushes Apple off its profitable throne.
Winner #4
One of China’s Biggest
Wireless Success Story
China is the world’s largest mobile-phone market.
Subscriber growth in 2005: An amazing 18%!
But forget about the big cell phone players slugging it out for market share. If you want a piece o the China cellular pie, look at the wireless value-added services (WVAS) industry instead.
I’m talking about features like customized ring tones, games, text messaging, interactive voice response, music, and Internet access.
Chinese consumes spent $20 billion for WVAS services last year, and this not-so-little niche is expected to grow by 20% each year through 2010.
I’ll tell you more as soon as I’m back.
Winners #5 … and #6 … and #7
The next time you hear from me, I will be sitting in Hsinchu City, the Silicon Valley of Taiwan, where I’ve got a whirlwind schedule of meetings and tours with the most exciting, fastest growing technology companies in Taiwan. So stand by.
Best wishes,
Tony
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About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Beth Cain, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
© 2006 by Weiss Research, Inc. All rights reserved.
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