Technology Trader

 | SATURDAY, JULY 3, 2010

After Plunge, PC Stocks Are Screaming Buys

By ERIC J. SAVITZ | MORE ARTICLES BY AUTHOR(S)

Microsoft, Nvidia, Western Digital, Intel and others are battered as sales outlook remains strong. Many have huge cash positions.

EARLIER THIS YEAR, I PREDICTED that PC unit-sales volume would grow 20% in 2010, and theorized that this would be good news for the whole personal-computer food chain. When I first made the call, my number looked on the high side versus the professional prognosticators', but over time, as data rolled in, projections from the Street and market-research firms alike ratcheted up to meet my forecast.

Having stuck my neck out, I am declining to pull it in, despite recent rough times for PC-related shares. I still contend that there are plenty of reasons to remain upbeat about the outlook for PC demand. Microsoft (ticker: MSFT) recently said that it already has shipped far more copies of Windows 7�150 million and counting�than almost anyone had foreseen. And corporate technology spending continues to improve, as demonstrated by better-than-expected recent earnings reports from Oracle (ORCL), Tibco (TIBX) and Accenture (ACN)―all of which generate most of their revenue from corporate IT budgets.

But unfortunately for anyone in sync with my bullish views, all of the players in the PC group have recently suffered huge stock-price declines. There are perfectly understandable reasons for the slide. But the selloff has been dramatically overdone. Bargains now abound.

 

Summer Funk: The Nasdaq lost 9.4% over two weeks to reach a new 2010 low, bogged down by concerns that global growth is slowing.

Let's assess the damage. I looked at the stocks of eight major players: Microsoft, Intel (INTC), Dell (DELL), Hewlett-Packard (HPQ), Marvell (MRVL), Seagate (STX), Western Digital (WDC) and Nvidia (NVDA). I could have included other names, but this is a fair cross-section. Through Thursday, the final day of the first half, all of them sported losses for the year, ranging from 4% for Intel, to 44% for Nvidia. On average, they had fallen close to 23%.

Even worse is the sample group's performance since tech shares peaked. While the date on which each stock topped out varies a bit, all hit recent highs sometime from April 14 to April 23. Since then, the losses range from 20% for Intel to 42% for Nvidia. On average, they're down 29%.

Ouch!

As noted, some legitimate concerns afflict the group. For starters, the overall stock market has been under intense selling pressure from revived concern about the economic recovery's health. Tech stocks, in general, tend to have high exposure to the euro, and that currency's rapid deterioration against the dollar is pressuring reported earnings; the effect showed up in the recent results from Oracle and Accenture, and it will be a common theme in the next earnings season, which is fast approaching.

Meanwhile, there are signs of softness in consumer demand. In mid-June, Best Buy (BBY) reported weaker-than-expected results for its fiscal first quarter ended May 29. As I noted last week, Research In Motion (RIMM) had disappointing May-quarter results, and Dell posted uninspiring margins for its fiscal first quarter, ended in April. Auto makers last week reported June sales that fell short of Street expectations, and the Conference Board noted a big drop in consumer confidence in June.

To make matters worse, DRAM maker Micron Technology (MU) last week offered August-quarter guidance that disappointed the Street. And there has been a flurry of estimate cuts for the disk-drive companies, where demand seems to have at least temporarily softened, resulting in a round of price reductions. Add in growing concern that netbook sales could be hurt by the crazed demand for the Apple (AAPL) iPad tablet, and you have had a perfect storm of bad news for PC stocks, which acted accordingly.

But business spending on PCs remains robust, as suggested by both recent results from the likes of Accenture and the impressive demand that Microsoft just reported for Windows 7. I still think this is shaping up to be a huge growth year for PCs; iSuppli says that global shipments in the first quarter were up a gaudy 22.7%.

Upshot: the PC-related stocks are screaming buys.

Let's start with the disk-drive makers. While Seagate and Western Digital always trade at low multiples, due to their long history of boom-and-bust cycles, the structure of the industry has changed in recent years, eliminating some weaker hands. Seagate now trades at under four times consensus estimates for the June 2010 fiscal year; Western Digital trades for under five times. (Western, in particular, looks even cheaper when you note that it has 25% of its market cap in cash.) And the rest of the names in my list? All trade at 9 to 11 times forecasts for the current year, and 8 to 10 times those for the following year.

And that's without taking into consideration the huge cash positions some of these companies have. Microsoft, in particular, has more than $47 billion in cash plus short- and long-term investments―close to a quarter of its stock-market value.

The stocks have been so battered that it's time to go bargain-hunting. I particularly like Microsoft, which lately has been receiving such bad coverage in the financial press �former analyst Henry Blodget essentially predicted the company's demise a few weeks ago, on the blog Silicon Alley Investor―and which will continue to benefit from the new-product cycles in Windows, Office, Bing and other key products�as well as Intel, which recently predicted that its revenue and profits would rise at a double-digit annual rate for at least the next few years. My advice: Take a deep breath, diversify your risk, buy a basket, and hang on.

ONE OF MY MOST FREQUENT HAUNTS on the Web remains Amazon.com (AMZN), which as I have noted previously has become my default choice for buying almost anything. (This week alone, I bought a netbook and some textbooks for my son away at summer school, a book for me and a large box of watermelon Jolly Ranchers, among other things.)

But for a while Tuesday, you couldn't buy anything at all, as the site suffered a severe outage which made it effectively inoperable. That sort of thing happens with the Web; the Barrons.com servers certainly blow a gasket on occasion. But what worsened matters was the lack of communication from Amazon, which has barely acknowledged that anything went wrong. My blog posts on the Amazon outage have drawn more than 200 comments, many from customers panicked that they had lost all the information stored in their shopping carts�or worse, that something might have happened to the credit-card info they have stored on the site. Really, would it have been asking too much for Amazon to issue some sort of reassuring statement, to explain the outage to the gazillions of people who rely on the site�and to assuage their concerns on the safety of their data?

Come on, Jeff Bezos, your customers deserve better