It was a generally dismal day for the Nasdaq (INDEX: ^IXIC ) , with the index falling 0.76% while the S&P 500 slid a more pedestrian 0.35%. Macro events haven't helped the situation today, with the International Monetary Fund saying its sees an "alarmingly high" risk of a steeper slowdown next year. It currently projects 3.3% growth this year, with 3.6% growth in 2013.
Yet for all the negativity surrounding the global growth situation, there were both winners and losers around technology. Let's check in to see what was driving tech stocks today.
First up is Netflix (Nasdaq: NFLX ) , which soared more than 10% today. Another bullish note from the analyst community sent the company's shares north today, with Morgan Stanley upgrading Netflix to a buy. In what's becoming a repeated sentiment among analysts upgrading the stock, Morgan Stanley's Scott Devitt noted content costs might not be as crushing to Netflix's bottom line as he had previously expected.
Along with an upgrade late last week from Citi and a bullish presentation from Whitney Tilson at the Value Investing Congress, Netflix is making a rebound in popularity on Wall Street.
There are a lot of reasons to be concerned about Netflix, and repeated encroachments into the streaming space by not only Amazon.com (Nasdaq: AMZN ) but now also a Verizon (NYSE: VZ ) and Coinstar (Nasdaq: CSTR ) tie-up makes streaming look like more of a commodity. However, at the end of the day, the most persuasive reason to own Netflix still looks to be how cheap the company has gotten relative to its large subscriber base. At the time of Whitney Tilson's presentation, Netflix was at an enterprise value (a measure that nets out cash) of only $99 per paid subscriber. That's a pretty rock-bottom valuation for a recurring revenue subscription business with solid customer loyalty.
Since that time, Netflix's rallying shares have pushed that level closer to $130 per subscriber. Netflix is no slam-dunk, but with 29% of its shares sold short, rallies like the company has seen in the past week can build upon themselves. I wouldn't want to be in that 29% group right now.
Qualcomm (Nasdaq: QCOM ) saw its own shares sink just a hair shy of 2% today. The obvious catalyst was once again a downgrade; Avian Securities cut the company to neutral from a buy.
Should investors be cashing out their chips on Qualcomm? I'm not so sure. Avian noted increased competition from companies such as MediaTek, NVIDIA (Nasdaq: NVDA ) , and Broadcom (Nasdaq: BRCM ) across the processor space. Investors should be concerned about a company like MediaTek, as its racking up market share in the lower end of the smartphone processor space. In addition, Broadcom has scored victories with Samsung. That's never a welcome sign, as Samsung is quickly becoming the dominant player in the Android world. With NVIDIA, the researcher noted the company is gaining tablet traction.
However, the problem is, while Qualcomm's mobile processors get a ton of attention for their success, they're still a relatively small (yet growing) part of the company's business. With Qualcomm, last quarter the company racked up $1.4 billion in profits from its licensing business, while its chips brought in $472 million in profits.
More to the point, less than half of Qualcomm's revenue from its chip division probably came from smartphone processors. The rest was from shipping baseband chips to process wireless communications. Even if Qualcomm does lose some processor share -- currently it collects about 48% of smartphone processor revenues, according to researcher Strategy Analytics -- it will probably continue getting baseband wins, especially in LTE, where the company has established a clear leadership position.
Long story short, the mobile processor market is getting more competitive, with MediaTek gobbling up low end share, but I think long-term-oriented Qualcomm investors are best ignoring a downgrade that cut its price target on the company by only $2 per share and should spend more time on high-end threats such as Intel's (Nasdaq: INTC ) new smartphone chips, which are seeing surprisingly positive reviews. Big picture: It's Intel that is the largest threat to derailing Qualcomm's position atop the smartphone processor game.
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