Biting Into Tech Stocks in the PC Food Chain (INTC, AMD, ARMH, QCOM, NVDA, MSFT, RHT)

The dining table looks more bountiful than it has in years for computer makers, as well as for the rest of the PC food chain. According to a recent ChangeWave corporate PC spending survey, nearly three-quarters of respondents said their company would be buying laptops in the first quarter of 2010, while nearly 70% said they would be purchasing desktop computers. That’s the highest level for both metrics since February 2008. The improved conditions in the corporate PC market are echoed by additional findings in consumer PC purchasing, where a separate survey revealed a rise in planned buying among consumers to the highest level since the 2007 holiday season.

As you might infer from these results, the big PC makers stand to benefit greatly from this renewed willingness to purchase computers. Dell (DELL), Hewlett-Packard (HPQ) and even the oh-so-non-PC Apple (AAPL) all are box makers likely to continue seeing increased sales as a result of the improved corporate and consumer attitude toward computer buying. But just sticking to the box makers alone isn’t the only way to fill your portfolio’s plate with PC winners. In fact, the tastier picks in this space are actually down the PC food chain.

At the heart of any PC is its semiconductor chip, and in this space there are several big players. The 800-pound chip in the sector is Intel (INTC), and in January the company blasted through earnings expectations with one of its biggest beats ever. In the fourth quarter, Intel posted revenue of $10.6 billion, a 28% increase over the prior year and handily above consensus estimates for revenue of $10.2 billion.

In the earnings column, Intel logged a profit of $2.3 billion, or 40 cents per share, which beat Street expectations by 10 cents per share. And if you back out the $1.25 billion settlement with rival Advanced Micro Devices (AMD), earnings would have been $3.1 billion, or 55 cents per share. Intel also said it expects sales for the current quarter to rise approximately 36% from the same quarter last year. The company also expects gross margins for the full year to be about 61%, and if that does happen it would be a huge improvement over gross margins of 55.7% in 2009.

As for rival AMD, they too should see a boost in sales as a result of the PC buying spree. And while the company faces stiff competition from Intel, as well as rivals ARM Holdings (ARMH) and Qualcomm (

QCOM), in its CPU chip segment, AMD is expected to see a big surge in sales of its graphic processor chips, or GPU chips. And on the GPU front, AMD also faces competition from Nvidia (NVDA).

Both AMD and NVDA recently reported upbeat earnings results, yet both stocks have since sold off largely because they failed to meet heightened investor expectations. Of course, the sell off in these stocks could be seen as an opportunity to pick up shares of each at very attractive prices, especially given the upbeat mood in the PC purchasing environment.

If we travel a little further down the PC food chain we have the operating system, or OS, and when you talk about OS makers you’re essentially talking about Microsoft (MSFT).  Indeed, one big reason why the Alliance PC sales surveys have been so upbeat is due to the Windows 7 upgrade cycle. In late January, Mister Softee posted a 60% gain in fiscal second-quarter profits, and it did so largely as a result of the mass migration to its newest, and arguably best, operating system.

In its fiscal Q2 report, Microsoft said revenue for its division that includes the Windows 7 OS rose to $6.9 billion from $4 billion in the same period one year ago. Profit for this division rose to an impressive $5.4 billion from $2.7 billion in the prior year. The company said it had sold more than 60 million licenses for Windows 7 by the end of December. If the upbeat Alliance PC purchasing survey results prove prescient, Microsoft’s OS sales could once again be strong in fiscal Q3. And though Microsoft is the hands-down winner in the OS space, open-source Linux OS vendor Red Hat (RHT) could also see a nice bounce from renewed corporate PC purchasing.

One final link in the PC food chain is the retailers. In this space, Best Buy (BBY) is perhaps the biggest beneficiary of renewed PC purchasing, but it’s by no means the only winner. Discount stores such as Target (TGT) and Wal-Mart (WMT) also will likely benefit from better PC sales as well. Of course, these discount retailers and even Best Buy are not dependent on PC sales for their bottom lines, but a pickup in computer sales could be enough to push their respective bottom lines above Street expectations in the coming quarter.


Article printed from InvestorPlace Media, https://investorplace.com/2010/02/tech-stocks-in-pc-food-chaim-intc-amd-armh-qcom-nvda-msft-rht/.

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