COMMENTARY -- Talk about going in with preconceived notions.
Almost everyone paid to pay attention to tech stocks believes the PC market's growth rate is declining. After all, Microsoft (Nasdaq: MSFT) has been talking about a slowdown for the last several months. Intel (Nasdaq: INTC) two weeks ago warned about revenue. Dell (Nasdaq: DELL) emerged with a caution this week.
Micron Technology (NYSE: MU) presented a different picture during its quarterly conference call last night. Wall Street doesn't care: MU shares fell more than 10 percent by early afternoon today.
As one of the world's Big Three memory chip manufacturers along with Samsung and Hyundai, Micron provides a better look into the overall PC industry than any other company except Intel (Nasdaq: INTC). Micron executives yesterday suggested the environment harbors less gloom than other observers anticipate.
"We can only convey to you what our customers are telling us, and at this point our customers are telling us to prepare for a typically strong Christmas season," sales and marketing VP Michael Sadler said during the call.
Some analysts were encouraged. Lehman Bros. kept its MU price target of $120, which might strike some folks as a fantasy given the horse-whipping applied to Micron's stock over the last few months. Sanford Bernstein continues to see Micron as an "outperform" stock.
But observers such as ABN Amro's David Wu say even though DRAM prices are stabilizing, it's happening at a lower-than-expected level. Wu cut his MU price target to $100 from $120.
Other doubts came from Thomas Weisel Partners, which downgraded Micron to "Buy" from "Strong Buy", and Prudential Securities, which said demand from the PC market remains "unclear".
A few analysts simply didn't believe company executives. Sadler and others insisted that customers' DRAM inventory levels are now at a comfortable level for Micron, but SG Cowen writes this morning: "An overhang of DRAM inventory and disappointing PC demand temper the outlook."
Micron told analysts to expect only single-digit percentage growth in DRAM bit production for the first quarter. But the company laid that on internal issues, including manufacturing slowdowns as the company shifts to 0.15 micron sizes from 0.18, and a decision to direct more wafer starts at SRAM and flash memory products for communications devices. The PC market itself looks the same as ever to Micron.
Micron isn't a perfect bellwether. Certainly the PC industry wasn't as a strong in the summer as Micron's fourth quarter results would indicate; much of MU's financial performance was fueled by OEMs stockpiling DRAMs in anticipation of a shortage later this year.
There are times when analyst skepticism is justified. Still, after yesterday's conference call, it's reasonable to ask if all this pessimism is unwarranted, because it's not like analysts have any better grasp on the direction of DRAMs than Micron does. Basically, the Street insists on punishing the stock because of things said by Intel and Dell.
At the same time, investors not only ignored Micron's own perspective, but also overlooked statements from Gateway (NYSE: GTW) and Compaq (NYSE: CPQ), both of which said they feel fine.
Maybe I'm just a crazed PC defender, but with all the mixed signals around, I'm inclined to give Micron the benefit of the doubt, especially considering the stock has fallen nearly 60 percent during one of the strongest quarters the company has had in recent memory.
Micron currently trades at about eight times estimated earnings for fiscal 2001. You're not likely to find cheaper shares of a major tech company, particularly one that maintains a reasonably upbeat outlook.
Two reasons: Dell's miss is narrower than Apple's; and expectations for Dell were lower to begin with.
Although Dell executives until yesterday insisted they could meet their 30 percent growth target, almost no one on Wall Street believed them anyway. U.S. Bancorp Piper Jaffray's frequently-quoted and much-reviled-by-ZDNet-readers analyst Ashok Kumar more than a month ago used the adjective "unsustainable" to describe Dell's revenue target.
Thus, Dell's preannouncement is nothing more than a confirmation of what observers already suspected, while Apple completely surprised Wall Street.
You could argue Dell deserves a bigger slam because of its higher valuation. Before the warning, Dell shares traded at 30 times estimated fiscal 2001 earnings, compared to Apple at 25 times prior to its alarm last week. The gap has since been magnified: Apple has plunged to a forward multiple of roughly 13, while Dell today remains in the upper 20s.
Would a rational market knock Dell down further? Sure. But keep in mind that Dell's future, while dimmer than before, also seems to hold more potential than that of a vendor such as Apple. At the moment, the only certain thing about Apple's future is OS X, and that's not so much an addition to the business as an upgrade from previous offerings. Meanwhile, Dell is pushing into new markets -- already, half of revenue comes from non-PC business.
Troubles in Dell's core operation also seem confined to Europe, or at least that's what the company says. Seems plausible enough, given that Intel said the same thing.
On the other hand, Apple sees weakness in all parts of the world. Its problems seem broader than those of Windows PC vendors, so AAPL shares have suffered more. 22GO>