For tech companies, earnings season is off to a rough start.
To be clear, investors basically did this to themselves. Amid a pandemic, a global recession, soaring unemployment, and social unrest, tech shares merrily skipped along, many soaring 30%, 50%, 100%, or more. And Wall Street analysts giddily played along, ratcheting up estimates and price targets.
Two weeks into the second-quarter earnings period, however, the air is leaking from what had clearly become a tech bubble. Let’s review:
No opportunity is unlimited:
(ticker: NFLX) had a strong June quarter, adding 10.1 million net new subscribers to the 15.8 million added in the March quarter. But the streaming giant warned that two quarters of huge growth almost certainly pulled demand forward—guidance for the third quarter calls for just 2.5 million subscriber additions, less than half of what analysts had been projecting. For Netflix, the pandemic boost is over. That’s sobering, and it should leave investors who are in other shelter-in-place stocks, like
Zoom Video Communications
(TDOC), wondering if the same applies to them.
The cloud is not a cure-all:
(IBM) posted a better-than-expected June quarter. Big Blue said that its cloud business grew 30% and now accounts for a third of sales. That’s nice, but the other 70% of the business is struggling. Services had a sharp decline and will almost certainly shrink further, as many industries face financial pressure. For any business reliant on selling information-technology services and on-premise software, the lesson here is that tech is not immune to recessions.
Even clouds can disappoint:
(MSFT) surged to record highs in recent weeks, driven by optimism about its cloud business, which includes Azure and Office 365. And the company crushed estimates, with surprising growth in consumer-facing segments like Surface PCs and Xbox games. But margins fell a couple of points, and Azure’s growth, at a currency-adjusted 50%, decelerated by 11 percentage points from the March quarter. Microsoft shares were priced for perfection. The company delivered a quarter with a few blemishes, and investors took profits. The unexpected Azure issue raises the stakes for the
(GOOGL) cloud services when those companies report this week.
The future matters more:
(INTC) posted a strong quarter, too. But the chip maker revealed a huge setback in its push toward seven-nanometer-process technology—raising questions about how a company once revered for its manufacturing brilliance is now considering outsourcing more production to more-capable outside fabs like
Taiwan Semiconductor Manufacturing
(TSM). It’s an embarrassment and a boon for rival
Advanced Micro Devices
(AMD). The lesson? Investors pay for future performance, not past results.
is an obscure San Jose—based company that has piled up a remarkable collection of tech patents—and the stock seems seriously underpriced. Xperi (XPER) was built through a multiyear series of acquisitions. The cornerstone deal was in June, when Xperi combined with TiVo, the once-iconic producer of digital video recorders.
With the TiVo deal closed, Xperi has 11,000 patents, many focused on video and audio technology; annual revenue of well over $1 billion; and more than $420 million in annual cash flow. Xperi has an enterprise value of about $2.4 billion, which seems absurdly low. Comparable companies like
(RMBS) trade in the range of four to six times revenue; Xperi trades for under two times revenue.
To address that issue, Xperi plans to divide into two companies. CEO Jon Kirchner thinks that a split can unlock considerable value. About half of its business comes from patent licensing. The other half produces software, which it monetizes with a licensing model—similar to what Dolby does.
B. Riley analyst Eric Wold has a Buy rating on Xperi shares and a price target of $35—more than double their recent price of $15. “Considering the attractiveness of a combined portfolio…and continued evolution of media inside and outside the home, we see an opportunity for increased penetration of existing customer relationships with the combined offerings,” he wrote in a recent research note.
The kicker is TiVo’s long-running patent dispute with
(CMCSA). TiVo has been asserting that Comcast’s X1 set-top box violates its patents. TiVo has sued Comcast three times before the U.S. International Trade Commission, seeking an injunction barring the sale of the X1 box. The first two times, TiVo won, but Comcast figured out workarounds and paid nothing. The third trial decision is due this week. Wold thinks that a win could mean as much as $55 million a year in royalty payments and a catch-up payment of as much as $275 million. But Wold isn’t counting on a win—even without one, Xperi looks remarkably cheap.
Write to Eric J. Savitz at [email protected]