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Tipping Point For Tech

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Expectations in tech got way out of hand. Expectations are still way out of hand.

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Intel (INTC) missed by two cents but you certainly would not know it by the spin put out on headlines like Intel reports 51% jump in net income.

Two hours later after Intel was pounded $3.00 or so in after hours trading more realistic headlines appeared such as this one: Wall Street Pounds Intel on 4Q Results.

The Santa Clara-based company's results, released after the market closed Tuesday, narrowly missed Wall Street's profit and sales expectations. The jolted investors who thought the technology bellwether was shielded from the housing and lending morass that has crimped consumers' discretionary spending, analysts said.

"The stock is reacting as hard as it is because the market was expecting Intel to be at the tail of the dog -- not really seeing the weakness we're seeing in retail yet," said Doug Freedman, an analyst with American Technology Research. "But the numbers at the top line suggest they are absolutely seeing this weakness."

Out of Hand

What tech had going for it was simple: Tech had nothing to do with the housing bubble, CDOs, CMOs, SIVs, and all sorts of other three letter acronyms that are now imploding. As a result, there was a mammoth amount of herding into tech as a "safe haven." Expectations got way out of hand. Expectations are still way out of hand.

Intel Sees No Recession

I find this report rather interesting: Intel CFO saw no signs of U.S. recession in fourth quarter.

Intel Corp. did not see any signs of a U.S. recession in the holiday-sales-fueled fourth quarter but is somewhat cautious going into the first quarter, the chipmaker's CFO said on Tuesday.

"We did not see a slowdown over the course of the fourth quarter," Chief Financial Officer Stacy Smith said in a phone interview. "We're a little bit cautious based on what we see in the U.S. economy." Smith also noted the United States accounts for less than 25 percent of Intel's overall revenue.

"We're not seeing signs of economic recession," Smith said.

Time To Leave The Silicon Tower

Stacy Smith and Intel need to get out of their silicon towers and look at the real world.

In the real world...

Intel's 8K

Let's take a look at Intel's 8K.

"2007 was a breakthrough year for innovation at Intel," said Paul Otellini, Intel president and CEO.

  • Intel Posts Record Quarterly Revenue
  • 2007 Operating Income $8.2 Billion, up 45%
  • Fourth-Quarter Revenue $10.7 Billion, up 10.5 % Year-over-Year
  • Gross Margin 58%, up 8.5 Points Year-over-Year
  • Operating Income $3 Billion, up 105% Year-over-Year
  • Record Microprocessor and Chipset Units and Revenue
  • Net Income $2.3 Billion; EPS 38 Cents

The Market Says...

This is as good as it gets.


Click to enlarge.


Why was this so hard to see? Looking ahead, why is it so hard to see that Intel is still way too optimistic? Businesses are cutting back spending, consumers are tapped out, Unemployment is Soaring as Private Sector Jobs Contract, things are slowing in the US, UK, EU, and even China.

I do not expect a brilliant performance out of Microsoft (MSFT) either, but perhaps it has one good quarter left. Then what?

Given how oversold everything is, a bounce at any time can be expected. Then again, when expected bounces from oversold do not happen, the possibility of a crash is very real. Regardless of what happens here, I expect tech to catch up on the downside in 2008 rather than financials catching up to technology headed North.

If we have learned anything from 2000 it should be this: Frothy forward expectations eventually hit reality. Everyone acts as if Google (GOOG), Cisco (CSCO), Intel, Research In Motion (RIMM), and Apple (AAPL) can keep on beating expectations with the US in a recession and the EU and UK headed there. Here is a safe bet: They won't. Tech is not immune to a recession.

It's time to leave the silicon tower and face reality. Tech has topped.


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No positions in stocks mentioned.
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