Tech Daily: Intel Results, Netflix Surge, Apple Valuation, Google-ATVI Deal, More

Sejuti Banerjea

The top stories in this digest are Intel’s INTC earnings, Netflix’s NFLX surging share price, Apple’s AAPL valuation concerns, the Alphabet GOOGL-Activision ATVI deal and positive sentiment on the memory chip segment. These and other stories are detailed below-

Intel Results

Intel’s reported earnings of $1.52 thrashed the Zacks Consensus Estimate of $1.24 while revenues of $20.2 billion did just as well, beating the expectation of $19.2 billion.

While performance was mixed across segments, the company’s all-important DCG segment did much better than expected. Notably, investors heaved a sigh of relief as sales to cloud service providers grew 48%, allaying fears that they’ve successfully built in-house components. This was the primary driver of share prices, which jumped around 9% since the announcement.

Telecom service providers also provided some 5G-related strength, but at 14% growth it wasn’t as significant. As expected, the PC business where Intel has the dominant share, held up well.

2020 capex guidance of $17 billion was above 2019 levels of $16.2 billion, because of expected 7nm and 5 nm investments.

While the first quarter will be another strong one for the DCG business, growth is expected to stabilize thereafter as cloud customers “digest” the purchases and competition (likely from AMD) increases. The PC market will also see the effect of Windows 7 end of life support.

Netflix Surge

“Comparing Netflix to introductory pricing and / or inferior OTT products as a justification for worrying about the competitive climate is missing the fact that the cable, telecom, and satellite video industry (where all the money is) is shrinking with no end in sight,” Stifel analyst Scott Devitt said, in no uncertain terms. As a result, he expects the shares to double in the next 4-5 years.

Its illustrious streaming peers Disney+, Amazon AMZN Prime Video, Apple  TV+ and soon, AT&T T notwithstanding, the analyst thinks that traditional TV is the company’s main competition, so the increase in cord-cutters is the real positive for the stock.

The thinking seems to be that despite increased competition (validated by management’s comment about increased quarterly churn when two rivals launched), the expansion of the streaming space itself will boost Netflix numbers.

So investors were willing to set aside concerns related to muted subscriber growth expectations, scope for price increases and interesting reclassification of views that management talked about on the earnings call, sending the shares up.

Apple Opposes EU Common Charger
    
The EC has spent a decade calling for a common charger for all mobile phones to mitigate the environmental impact of extra chargers. In 2009, it even managed to get smartphone market leaders Apple, Samsung, Huawei and Nokia to sign a voluntary memorandum of understanding agreeing to harmonize chargers beginning with their next models to be launched in 2011.

However, while most mobile companies moved to USB-C, Apple stayed aloof. The company is now saying that the EU shouldn’t make laws that stifle innovation, especially when the actual gain is debatable (Apple-sponsored study by Copenhagen Economics showed that consumer harm from statutorily mandated common chargers would cost at least 1.5 billion euros, while associated environmental benefits would be around 13 million euros).

Analysts Weigh-In on Apple

Analysts more or less hold the view that Apple the company is doing great while Apple the stock is doing somewhat better. That’s why, following the 86.1% appreciation in 2019 and 8.4% appreciation since then, are making them a bit nervous.  

Wamsi Mohan of BofA (reiterates Buy rating, raises price target from $330 to $340) most recently commented that "the 5G cycle offers multi-year visibility on iPhone sales and this, combined with double-digit Services revenue growth, has driven the multiple higher, in our opinion… We expect another leg up in the stock after Apple reports" with AirPods and iPhone 11 supporting results and LCD phones impacting the gross margin.

But after that, the analyst thinks that positive estimate revisions will likely be unachievable because of tariff, gross margin and opex headwinds. Specifically, there is, according to him a pricing dilemma related to 5G phones (higher prices will impact sales while lower prices will hurt margins), the likelihood of gross profit dollar growth peaking in the March quarter and consensus touting buybacks too much, all while the P/E advances to the high-end of the long-term range.

Andy Hargreaves of KeyBanc Capital Markets held a similar view that the valuation “appears to require a sustained re-acceleration in top-line growth that we do not anticipate, while leaving little room for error” and “limits the potential for further multiple expansion.” He’s also concerned about potential declines in iPhone average selling prices, “stagnating” user growth and brand risk in China. He too is optimistic about the soon-to-be-reported quarter.

Microsoft Analyst Opinion

Brent Bracelin of Piper Sandler reiterated his Overweight rating on Microsoft MSFT shares and bumped up the price target from $158 to $190.

Apart from its net cash position of $67 billion on the balance sheet and a potential operating cash of $200 million over the next three years that will bolster M&A and support business growth, the analyst sees positives in cloud revenue CAGR acceleration from 8.5% to 12%; developer relation-building through GitHub and Visual Studio Code, and potential gains from a major gaming console cycle.

The only things he’s cautious about are Intel CPU shortages that could impact Windows and Surface devices and the tapering off of benefits from the end of life of Windows 7, Server 2008 and SQL.

MS Turns Positive on Memory Chip Outlook

Morgan Stanley analyst Joseph Moore upgraded Micron MU and Western Digital WDC stocks to overweight from equal weight. Additionally, Micron’s price target went from $56 to $73 while Western Digital’s moved from $64 to $88.

"We did not expect memory fundamentals to bottom this quickly, but as proof points grow, the ramifications are significant.” Further, “The higher trough and the elevated valuation environment for semis suggests memory rerating potential even give the moves we have already seen."

While admitting that memory prices “started to stabilize six months ago,” he said that “we have seen a notable difference in mentality from memory buyers that belatedly convinces us that these changes can persist.” Moreover, his channel checks confirm that supply will get tighter through the year even as more inventory is made available.

Cowen analyst Karl Ackerman agrees and attributes the changed buyer mentality to smartphones, “the sponge that is quickly soaking up excess memory supply,” thus pressuring supply and raising prices. He says Micron particularly but also Western Digital will benefit from this.

Susquehana upgraded the stocks toward the end of December when RBC Capital Markets announced the official “bottom on memory pricing.”
Google Search Results Design

An algorithm change that Google is rolling out widely after first pushing out to mobile users will present the search results in a way that they become practically indistinguishable from ads that are stuffed into the top of the page. This could be a way for it to keep search advertising dollars growing strongly as users click on ads they assume to be search results. It makes sense because competition is stiffer today than it has ever been before.   
    
 Google Partners with Activision

Activision Blizzard has chosen Google Cloud as its infrastructure partner citing “highly reliable global footprint, advanced data analytics and artificial intelligence capabilities, and commitment to open source, creating a platform for building future gaming innovations.” Moreover, it has made YouTube Gaming its exclusive streaming partner.

Live streaming of esports requires low latency and power to ensure quick response time and high quality video that are essential for a consistent experience across devices. ActiVision is a leader in the place and this is a real feather in the cap for YouTube Gaming, especially since it has wrested the deal away from Amazon’s Twitch, ActiVision’s earlier partner.

Attorneys General Take Tough Stand on Google

In a first-ever move, U.S. state attorneys general are meeting Justice Department attorneys this week, to discuss Google’s likely inappropriate actions and abuse of position as the dominant player in the online advertising and search markets. The company is up against separate probes by federal and state agencies for anticompetitive behavior, but this meeting is more about exchange of information and says something about the behemoth Google has become.

Google’s headaches increased last year, when after paying a hefty fine to the EU, the attorneys general from 48 U.S. states, the District of Columbia and Puerto Rico formally launched an investigation into its activities.

And they aren’t stopping there. Attorneys general from nine states have also urged U.S. District Judge Charles Breyer in San Francisco to set aside Google’s settlement with privacy rights organizations and some individual consumers who led a class action lawsuit for violation of privacy with respect to its Streetview mapping technology.

Amazon Brand Leads Google, Apple Microsoft

According to the Brand Finance Global 500 index, Amazon’s brand value soared 17.5% in 2019 to $220.8 billion, the first company to cross the $200 billion mark. It was followed by Google, Apple, Microsoft and then, Samsung. Chinese brands Industrial and Commercial Bank of China, Huawei and insurer Ping came next with Facebook and Walmart rounding out the top ten.

Amazon Employees on Climate Change

300 employees belonging to the advocacy group Amazon Employees For Climate Justice signed a blog post demanding environment friendly operations. Many also made public statements about the company’s limited progress on addressing climate change issues. The current target is to become a zero emissions company by 2040, but these employees believe that given its size and financial capabilities, the company should do more and even take a leadership role in effecting change.

Amazon’s response was succinctly clear: “While all employees are welcome to engage constructively with any of the many teams inside Amazon that work on sustainability and other topics, we do enforce our external communications policy and will not allow employees to publicly disparage or misrepresent the company or the hard work of their colleagues who are developing solutions to these hard problems.” Employees have reportedly been warned that they could get fired for protesting too hard.

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