IBM’s plan is to move to higher value with a focus on hybrid cloud hosting and services. Investors remain skeptical of Big Blue’s ability to be an “incumbent disruptor.” The company rarely misses consensus EPS, which is $4.84 for 4Q—we are at $4.88 on revenue of $21.8bn and a tax rate of 14.7% as expansion in services margins counteracts headwinds in product mix and currency. Guidance is tricky given divestitures and the Red Hat acquisition. We look for “at least $13.75” with variability to the downside and a required low tax rate.
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The Wolfe Tech Universe rose by 5.5% compared with the S&P 500’s 2.5% increase. Semis rebounded by 7.5%, still the worst performing sector over 12 months but only trailing Software over 3 months. In general, underperformers bounced, such as Renesas (+21%), Universal Display (+15%), and Micro Focus (+10%). Rightmove and Infosys are now overbought; Xiaomi is oversold. Short interest in Lam Research, Broadcom, and Nvidia jumped higher (p4). We lean toward the skeptical side regarding the rally.
IDC published worldwide PC shipment data today (01/11/19) after the close signaling a market units decline of 3.7% YoY in C4Q and full year decline of 0.4%. The sequential decline in the 4Q holiday quarter was the largest in six years. IDC pointed to sell through challenges in the quarter as a result of anticipatory inventory stockpiling in 3Q. In addition an uncertain Chinese business environment should cause buying pressure in the future, partially offset by the effects of the Windows refresh cycle. We see potential downside to our numbers for HP In. in F1Q19 and Dell in F4Q19 as a result of lower industry volumes.
We calculate the percentage of the 250 names in our Wolfe Tech Universe that are above their 200-day moving average, an indicator of intermediate trend (Exhibit 1). This statistic deteriorated well before tech stocks turned down. The recent bottom near a paltry reading of just 10% of names above their 200-day MA was a deeply oversold condition. On a weekly XLK chart, the RSI also has been lower recently than at any time in the past five years (Exhibit 2). It is similar to and even a bit lower than during the early 2016 pullback. The takeaway is that tech is due for a bounce, which we’ve seen the past few weeks.
After the close yesterday (1/8/2019), Apple provided a supplement to its late 2018 release, yielding additional quarterly detail for the reallocation of deferred revenue from hardware to services (link). We had adjusted our segment revenue numbers at the time of the initial release, so our revisions to quarterly numbers are immaterial. We hypothesize that the decision to distribute a more granular release indicates that some sell-side models still needed updating.
We initiate on the newly public Dell Technologies with an Outperform rating and $58 price target. Despite near-term earnings challenges and heavy debt, the equity looks undervalued assuming good execution. Management appears up to the task of running a technology conglomerate; VMware remains the most attractive piece.
The 2019 Consumer Electronics Showcase (CES) kicked off Tuesday (1/8/19) with a keynote address by IBM CEO Ginni Rometty. She shared her outlook on how technology will impact future business operations. She highlighted how deep data and advanced computing approaches will usher in a new age of artificial intelligence. We think IBM needs to be again perceived as a thought leader as part of improving its valuation.
CFO Tarek Robbiati and Head of Investor Relations Andy Simanek spoke at a competitor conference yesterday (1/8/19). Commentary on near-term results was positive in indicating that currency headwinds might be slightly better that expected at 1-2 points and noting that there should be no material impact from the federal government shutdown as well as limited exposure to tariffs. HPE also pointed to a stable earnings base with 75% of annual profit coming from Pointnext and financial services.
We have created stock lists that reflect two long/short strategies. The first captures positive and negative momentum while the second is about reversals in identifying overbought and oversold names. Momentum works if the trend continues while reversal pays off if the recent trend reverts. We use the 30 top and bottom ranked stocks in each approach. We will calculate the hypothetical portfolio returns in three months and update the constituents.
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