Remember the top four tech and Internet stocks of 2007? Research In Motion Ltd. (Nasdaq: RIMM) climbed 166% over the year, Amazon.com Inc. (Nasdaq: AMZN) rose by 134%, Apple Inc. (Nasdaq: AAPL) gained 133%, and Google Inc. (Nasdaq: GOOG) added 50%. They have all taken a tumble since the start of 2008, with Apple sliding 40%, the worst return out of the four, and way in excess of the Nasdaq's own negative 13.2% return since the beginning of January.
Of the four, Research In Motion will probably the first to swing back to a positive return for the year, a development that could perhaps herald a rebound in the tech sector as whole. Research In Motion gained 14% over last week, narrowing its negative return since the start of the new year, and as of yesterday morning its return stood at just under minus 5%. Most of last week's gain was seen on Thursday, when the company surprised the market with an upbeat warning that its subscriber base at the end of its fourth quarter, ending in February, will be between 15% to 20% higher than the figure in its guidance at the close of the preceding quarter.
The collapse in share prices in the tech sector since the start of 2008 was triggered by macroeconomic factors, in other words, a collapse in all the markets driven by a fear of a global recession, and a fall in consumption that could pummel profits. Looking at individual cases, the bears could point to specific troubles at each firm. In the case of Research In Motion Ltd. it will be recalled, the consensus among the prophets of doom was that given its reliance on subscribers in the business sector, which is about to offload tens of thousands of employees all owning its Blackberry handheld device, the company should have forecasted a sharp drop in its subscriber base in its guidance.
Research In Motion Ltd., it now appears, is far less dependent on the business sector than was thought and is also far less dependent than was thought on the North American market now sliding into recession. The company will end its fiscal year this week with 14.3 million subscribers, of which more than two million were added in the fourth quarter alone, in which it shipped 4.3 million new handsets to new and existing subscribers.
Research In Motion Ltd. is continuing to expand in Western Europe and it is seeing strong growth in South America. It is also seeing strong growth in Russia and Eastern Europe, markets to which it is relatively new. It launched the new Blackberry 8700 handset in China at the beginning of 2008, a move that has increased its subscriber base there. In Japan, too, the country's largest cellular operator NTT DoCoMo, (NYSE: DCM; LSE: NDCM; TSE: 9437) has managed to increase the number of its Blackberry users. The full extent of the harm caused to Research In Motion Ltd. (Nasdaq: RIMM) by the shrinking banking sector will only be revealed when the company issues its full-year guidance and unveils its results on April 2. It may well be that the company's reassurances in its last report two months ago were appropriate at that time, and that there could still be a certain degree of harm in the upcoming quarters.
Who cares about price
After the surprise from Research In Motion Ltd, I am expecting a similar development from another of the big four in 2007 - Apple, if only because the sentiment about it has been so negative of late. The forecasts about Apple have been so bearish that one might be forgiven for thinking that its product line is perhaps one of the worst on the market at present, while in reality the situation is quite the opposite.
I believe that out of all the leading telephony and computer companies, Apple is the least vulnerable to the recession, because it targets from the outset a user segment for whom price is immaterial. So if the sector leader, Hewlett Packard Co. (NYSE:HPQ) is thriving, as we reported last week, it would be somewhat farfetched to assume that Apple, the Mercedes of the industry with a very small market share, is experiencing a slowdown.
In addition, I have never heard so resounding a chorus of praise about a handset as I have about the iPhone, including from top-rate professionals. With this in mind, many people will be wondering how it is that a year on from the announcement and six months after the launch, there is not one handset on the market which comes even close to Apple's iPhone, especially when it comes to easy Internet access, an application which is increasingly becoming the most essential function on any handset today.
A flash of the future
SanDisk Corporation (Nasdaq:SNDK) held its analyst conference yesterday at its offices in California. Last year's conference was a somewhat grim event, coming just days after the company unveiled an emergency program that included job losses and drastic cuts in expenditure, including executive pay, because of the slump the flash chip market was experiencing at the time.
SanDisk's share, paradoxically, is now down 30% on the low it reached on its last analysts day, even though the company has long since overcome the crisis of a year ago and even issued an official announcement to that effect. The current low has been caused by a number of reasons. Flash prices have again tumbled to the low point they were at last year, and the company's guidance for the first quarter was lower than what the market had been hoping for. Notwithstanding the above, there is, I feel, one dark cloud hovering over the stock and it is related to its competitor - Samsung Electronics Co. Ltd. (KSX:5930).
In August 2009, the royalties contract between the two companies will end, and as long as investors don't get any reassurances about the likelihood of it being renewed, the share will continue to struggle. Logic would dictate that there is no reason why it shouldn't be renewed, even in a reduced format, since considering that Samsung has now been paying royalties on the patents for a number of years, it cannot abruptly drop them as long as they are valid, and it is known that they are valid for many more years to come.
Whether the two companies are negotiating about the extension of their agreement beyond 2009 is as yet unknown, although SanDisk has been hinting indirectly that Samsung would stand to gain by this. One such example came last week in the form of an announcement by Toshiba (TSE: 6502; LSE: TOS; XETRA, AEX, Paris: TSBA), carried by "Bloomberg", of plans to collaborate with SanDisk in the building of two more chip factories in Japan. The announcement quoted Toshiba president Atsutoshi Nishida as saying that the new factories, which would be ready to begin operating from 2010, will "also function as facilities to develop a memory chip that will succeed flash," although Nishida did not elaborate on this. SanDisk has apparently signaled by this that it has a road map in flash beyond the current generation of technologies as well, and that Samsung would do well to join the bandwagon.
Published by Globes [online], Israel business news - www.globes.co.il - on February 26, 2008
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