The early part of each quarterly earnings season is focused on technology companies as far as Northlake Capital Management’s strategies are concerned. Thus far, we have heard from Google (GOOG), Qualcomm (QCOM), and EMC Corporation (EMC). All three stocks reacted well to their earnings announcement, recovering a significant portion of recent share price declines. Heading into this earnings period, technology stocks sold off sharply on concerns about demand given weaker economic data around the globe. Foreign exchange was also a big worry. Technology companies are global as the language and use of technology crosses borders with ease. Furthermore, mega trends toward mobile broadband, smartphones, and big data are global.
GOOG, QCOM, and EMC each reported results that were very close to expectations. Wall Street was prepared for much worse. Guidance commentary was similar. QCOM guided lower although not as bad as feared. GOOG does not provide guidance but comments on business trends indicate no deceleration beyond the impact of foreign exchange. EMC reaffirmed its guidance, confirming the power of data storage trends. In the short-term, stocks react to news based on expectations. Expectations were low for GOOG, QCOM, and EMC due to macroeconomic fears. As it turned out, good operating execution and powerful long-term business trends allowed each company to beat the lowered expectations. In turn, the stocks rallied sharply. Let’s take a brief, closer look at each company.
The major takeaway from GOOG is that investors are growing more comfortable with the transition to mobile search. The big controversy in 2012 has been the balance between much lower average prices for search advertisements and much higher volume of searches. Both factors are due to the shift toward mobile computing. Additional influences are more searches in lower priced emerging markets, changes to Google’s ad serving technology, and foreign exchange. In the most quarter, the number of paid searches rose by 42%, while the average price per paid search advertisement fell 16%. In prior quarters, this sort of mix was greeted rudely by investors despite the company continuing to produce 20-25% revenue growth. This quarter the street reacted positively to the results. I think GOOG shares reached a positive tipping point with this quarterly report. The stock remains about % lower in 2012 and has plenty of room to make up.
QCOM actually slightly missed earnings and revenue estimates and issued guidance below current street estimates for the September quarter. Normally, this would have punished the stock. However, expectations were for even worse results and guidance. The stock had already fallen from the upper $60s in April, reflecting a summer slowdown in smartphone sales ahead of the iPhone 5 introduction this fall and supply constraints that leave QCOM short of inventory to meet current demand. The quarter proved to be a relief after a string of bad news. All of this is timing related. QCOM remains perfectly positioned to play the mobile broadband trend by providing the key semiconductor technology for smartphones and tablets. Relief and improved sentiment is a welcome change after a few tough months. I do not think the near-term is as bullish for QCOM as GOOG but beyond the next few months the investment thesis remains very good.
EMC preannounced its June quarter earnings and maintained full year guidance. The stock had pulled back from $30 to $23 since April as macroeconomic worries built and many other enterprise-focused technology companies reported shortfalls or cut guidance. I was remained confident in EMC for a couple of reasons. First, the trend toward management of data is as important as the trend toward broadband internet. Cloud computing is raising the demand for hardware and software solutions as requirements for data retrieval and management grow rapidly. This trend supports EMC’s business fundamentals even against the grain of a tough macroeconomic environment. Second, EMC announced upgraded products across most its product line in the spring. This was always part of the business plan but analysts apparently missed the positive impact. When the industry leader offers new products into a market with heavy demand the results can come quickly. This is the case at EMC and the upgrade cycle is protecting the company’s revenues against the deceleration in global economic growth. EMC is a boring stock compared to GOOG and QCOM but the long-term outlook is equally strong as “big data” and cloud computing are powerful and irreversible technology trends.
Disclosure: Google, Qualcomm, and EMC are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, an Illinois-registered investment advisor. Filings can be found at www.sec.gov. Google and Qualcomm are net long positions in the Entermedia Funds. The Entermedia Funds are long/short equity hedge funds focused on media, entertainment, communications, and related technologies. Steve Birenberg is co-portfolio manager of Entermedia, owns a stake in Entermedia’s investment management company, and has personal monies invested in the Funds.