The technology sector had some bombs in the most recent quarter. The three biggest that come to mind were Microsoft Corporation (NASDAQ:MSFT), Intel Corporation (NASDAQ:INTC), and Broadcom Corporation (NASDAQ:BRCM).
Performance of the group
Source: Ycharts
Microsoft Corporation (NASDAQ:MSFT) declined by 8.65% in the past month. Broadcom Corporation (NASDAQ:BRCM) managed to turn some heads with an 18.89% decline in valuation in the past month. Intel Corporation (NASDAQ:INTC) declined by 4.09% as its poor performance was largely pardoned. I think there’s a much weaker story at play, with Intel Corporation (NASDAQ:INTC).
Microsoft
Investors were largely unimpressed by the company. The biggest bummer was the company’s guidance.
Next quarter’s guidance indicates that demand for desktop PCs and the Xbox 360 will go down. The company may be able to offset its weaknesses in those businesses with strength in servers, Microsoft business (Office 365), Skype, and Bing/MSN. The transition to Office 365 has had a negative impact on earnings, which is why Microsoft Corporation (NASDAQ:MSFT) reported such a weak quarter. Analysts were expecting Microsoft Corporation (NASDAQ:MSFT) to generate earnings of $0.75 per share for the quarter; the company actually reported $0.66 in earnings per share for the quarter.
This weakness in performance seems short-term. I believe that the company’s server business will continue to grow. Microsoft Corporation (NASDAQ:MSFT)’s software as a service and cloud solutions should continue to grow as well. I also believe that the entertainment and device business should be on a strong path to recovery once the Xbox One is released. The Xbox One is priced higher than Sony’s PlayStation 4, making it more profitable.
The transition to Office 365 will have a positive impact on earnings after about a year. PCs could be due for a refresh once Microsoft Corporation (NASDAQ:MSFT) ends support for Windows XP as well. Businesses love Windows XP, but the lack of product support may cause a transition to Windows 8. Given enough time, I think Microsoft will generate higher rates of net income growth (in the upper single digits at least).
Intel
Intel Corporation (NASDAQ:INTC)’s biggest problem is the server segment. This weakness in performance is likely to persist as infrastructure needs are continuing to drop. Companies like Facebook and Google are able to operate their websites using fewer servers because servers have become more powerful. Five years ago, supercomputers and mainframes were far less powerful, forcing web giants to invest more capital into information technology. Today, infrastructure spending has lessened significantly.
Most of the growth in the cloud is being driven by software-as-a-service rather than infrastructure-as-a-service. This is why IBM and Oracle have been coming up short in recent quarters. There are only so many software ideas that are implementable across business and government.
The awkward thing about servers is that upgrade cycles have less of a positive impact on earnings. Given enough time, companies may figure out a tangible need for faster processors. With the vast majority of the cloud being centered on basic web programs and web pages, however, server demand may not increase by as much.
Broadcom
Broadcom Corporation (NASDAQ:BRCM) is a semiconductor company that focuses on chips that allow for wireless communications in the home and on mobile devices. The company offers chip designs for modems, smartphones, and near-field communication technologies. The company also generates revenues from patent licenses as well. The company’s rich collection of technologies has allowed it to grow revenues.
Source: Broadcom
Broadcom Corporation (NASDAQ:BRCM) reported year-over-year gains across all of its segments. Analysts were expecting much more from Broadcom Corporation (NASDAQ:BRCM) than what it had reported, however. Year-over-year, the company generated a 2% decline in earnings per share. The primary reason for this under-performance is falling demand for its product portfolio.
Source: Ycharts
Broadcom Corporation (NASDAQ:BRCM)’s performance peaked back in 2010. Following 2010, the company’s growth could not be sustained. The growth in the wireless networking business for homes peaked as consumer preference switched from PCs to tablets.
I find it highly doubtful that Broadcom Corporation (NASDAQ:BRCM) can justify its 38.8 price-to-earnings multiple. Analysts project that the company will report a 5.8% year-over-year decline in earnings for the fiscal year.
QUALCOMM remains dominant
QUALCOMM, Inc. (NASDAQ:QCOM) dominates in both tablets and mobile. Qualcomm holds 57% of the baseband market. Qualcomm’s recent release of the Snapdragon 800 is helping to keep competitors like Intel Corporation (NASDAQ:INTC) at bay.
Source: ArsTechnica
Qualcomm’s design wins in 4G technologies gives it a large moat, and let’s not forget that Qualcomm’s economies of scale are enough to keep Intel Corporation (NASDAQ:INTC) at bay. So what could competitors like Broadcom do to stay in the race against Qualcomm? Absolutely nothing.
Qualcomm projects that its revenues will grow by 19% to 23% for the full year. Meanwhile, both Intel and Broadcom had to lower full-year guidance in the second quarter. The momentum in mobile is strong. Unfortunately, both Intel and Broadcom have failed to generate critical mass in the mobile market.
Qualcomm reported earnings per share of $1.03 in the second quarter. The company was able to meet analyst expectation, which were set at $1.03 for the quarter. This should not come as any surprise to investors as Qualcomm provides some of the most accurate guidance figures among technology companies.
Conclusion
Broadcom will face difficulties with growing revenues as Qualcomm has too firm of a grip on mobile. I believe that Intel will continue to face difficulties in the server market. The faster the Intel processor, the lower the profit. I think Qualcomm holds the most promise out of the three semiconductor companies.
Microsoft has been having difficulties with generating revenue growth due to short-term difficulties across Windows 8 and Microsoft Office. I think that Microsoft Office will generate revenue growth once it transitions over to Office 365. This process could take many quarters, which will require investors to have a buy-and-hold mentality.
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel, Microsoft, and Qualcomm. Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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