A Hot Quarter for Tech

Industry giants led Nasdaq's climb -- and should keep it going

By Brad Moon, InvestorPlace Contributor


With one trading day left in the third quarter, the Nasdaq Composite Index is sitting at 3,136; up 17.5% compared to the the previous quarter’s close at 2,935. That’s a pretty good performance, especially given that the summer quarter is often fairly quiet.

As the season wrapped up and tech companies started announcing their new products, even the drag of a declining PC market and struggling social media companies couldn’t keep Nasdaq from climbing, led by several industry giants that saw significant stock price increases despite middling earnings reports.

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Apple (NASDAQ:AAPL) reported a decent fiscal third-quarter, with revenue of $35 billion and earnings of $8.8 billion ($9.32 per share). Despite the fact that the company beat its own forecast of $34 billion revenue and earnings of $8.62 per share, many analysts had expected more, and AAPL dropped over 5% on the news, to $570 in late July.

To put things in perspective, even though revenue declined from $39.2 billion in the previous quarter, it was up $9.5 billion year-over-year. Customers were holding off on iPhone purchases, knowing that the iPhone 5 was due for release. And indeed, once that key product was announced, it sold a record 5 million+ units on its first three days of sales. Apple stock is now in the $680 range, after briefly breaking the $700 mark earlier in the month.

Amazon (NASDAQ:AMZN) reported its second-quarter earnings on July 26, with revenue of $12.83 billion (up 29% year-over-year), but earnings of only $7 million — or just a penny per share. The company also warned of an expected loss when it reports its Q3 earnings in October.

Despite the poor performance, Amazon continues to enjoy investor confidence (heightened by news it’s building more distribution centers and the release of a slew of new Kindle and Kindle Fire e-readers and tablets). While taking some early lumps after reporting, its stock has climbed from the $217 range the day before it reported to $256 today, an 18% increase and just off its all-time high set earlier in the month when CEO Jeff Bezos unveiled the new Kindle devices.

Google (NASDAQ:GOOG) reported strong growth when it reported its Q2 earnings in July, with revenue of $9.61 billion and earnings of $2.79 billion ($8.42 per share), representing a 21% yearly revenue increase. The company continues to see high demand for its Nexus 7 tablet, its newly acquired Motorola Mobility division launched new Android smartphones in September and Google has enjoyed a certain degree of Schadenfreude as Apple twists in the wind over its decision to dump Google Maps in favor of its own (flawed) mapping app on the new iPhone and iOS 6.

A Citi report citing an expected increase on search-based advertising spending — along with diminished threats from the likes of Facebook and an improved picture at Motorola — sent Google stock to all-time highs in September, hitting $750 (it has continued to climb since, currently at $756) — a 30% increase since June.

Facebook (NASDAQ:FB) didn’t fare so well as Google, Apple and Amazon, continuing the fall from grace that started with its disastrous IPO. From an initial price of $38, shares have slid to $20.32, bottoming out at under $18 at the start of September.

In its first publicly traded earnings release at the end of July, the company reported Q2 revenue of $1.18 (up 32% compared to last year), but saw margins take a hit (from 53% to 43%) as sales and marketing costs quadrupled. Facebook continues to struggle with mobile and advertising, while security concerns won’t go away, along with worries that younger users are deserting the platform for alternatives such as Twitter.

While early investors have been burned, consider the fortunes of CEO Mark Zuckerberg, whose personal net wealth dropped a reported $9 billion between May and August.

Trends of note included the continued slide of PCs which took a toll across the industry.

Dell (NASDAQ:DELL) reported its third straight quarter of declining revenues with guidance of further slipping. Its shares took a 7% hit and have since continued to fall to $10, near all-time low territory.

Microsoft (NASDAQ:MSFT) reported its Q4 in July, taking its first-ever loss of $492 million (on revenues of $18.06 billion) after writing off its failed acquisition of aQuantive. Microsoft makes a big chunk of its money from the PC business — selling Windows and Office products — and soft PC sales combined with customers holding off on upgrades until Windows 8, led to losses or modest increases in those divisions. Its stock is currently at $30.16, just about where it started the quarter.

Intel (NASDAQ:INTC) delivered revenue of $13.7 billion in its July Q2, with $2.8 billion profits (EPS of $0.57), but it also reduced guidance for Q3 (low single-digit growth) based on soft demand from the PC market. Intel is down on the quarter, currently at $23 from a yearly high of $28.38 in April.

What to Expect in the Fourth Quarter

Look for impressive numbers as new products make their way to consumers in time for the holiday shopping frenzies. Q4 is traditionally a strong one consumer electronics companies.

Apple is expected to continuing setting new sales records with its iPhone 5. In addition to attracting new customers, the company has millions of iPhone 4 owners who saw no reason to upgrade to last year’s iPhone 4S, but are expected to make the leap now.

Apple is also expected to announce an iPad Mini in October, while iPad sales in general are on fire (they were up 84% this quarter compared to last year). Amazon’s Kindle Paperwhite e-reader and Kindle Fire tablets should sell well, although the profits from those won’t be seen until buyers start hitting Amazon.com to buy content.

Similarly, Google expects Nexus 7 tablet sales to continue at a brisk pace, and its Motorola smartphones are building buzz among those who want an iPhone alternative.

Things aren’t likely to be as happy on the PC side of things, although Microsoft should see a surge in revenue, thanks to the coming Windows 8 release (for PCs, tablets and smartphones), and the traditional Christmas bump in Xbox sales.

Redmond is also expected to release its new Surface tablets, which are a wild card at this point. They’re being introduced into an even more competitive environment, thanks to new tablet offerings from Amazon, Google and Barnes & Noble (NYSE:BKS), but combined with Windows 8 they could make a compelling case for enterprise adoption.

We may not see near 20% growth, but expect holiday shopping and demand for new smartphones and tablets to result in a solid quarter.

As of this writing, Brad Moon didn’t own any securities mentioned here.

Article printed from InvestorPlace Media, https://investorplace.com/2012/09/a-hot-quarter-for-tech/.

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