3 Big Movers: Yahoo!, SanDisk, and IBM

On earnings, Yahoo! and SanDisk impress, while IBM disappoints.

Apr 20, 2014 at 11:00AM

U.S. stocks registered four consecutive days of gains during this abbreviated trading week for their best weekly gain since July, with the benchmark S&P 500 up 2.7%, closing within 1.5% of its early April record high. The narrower Dow Jones Industrial Average (DJINDICES:^DJI) and the technology-heavy Nasdaq Composite Index (NASDAQINDEX:^IXIC) both rose 2.4%. And speaking of technology shares, three well-known technology names were among the biggest movers of the week: On the upside, Yahoo! (NASDAQ:YHOO) (+10.7%) and SanDisk (NASDAQ:SNDK) (+12.7%) and, on the downside, IBM (NYSE:IBM) (-2.7%).


It's earnings season, and Yahoo!'s gains this week were driven by its first-quarter results, which sent the stock up 6.3% on Wednesday alone. The portal's turnaround, led by CEO Marissa Mayer, appears to be gaining traction as the company beat Wall Street's expectations on revenue and earnings per share and, crucially, managed to grow revenues net of traffic acquisition costs for the first time in five quarters.

However, it was not Yahoo!'s results per se that financial journalists and analysts were most interested in, but rather those of Chinese e-commerce giant Alibaba, which is on the path to an highly anticipated initial public offering on the New York Stock Exchange. Yahoo owns roughly a 24% stake in Alibaba and, therefore, reports headline numbers for the company in its own report (with a one-quarter lag).

If Yahoo! exceeded expectations, Alibaba blew them out of the water with a 66% year-on-year increase in revenue in the calendar fourth quarter to $3.1 billion and a more than doubling in net income to $1.4 billion. Alibaba is expected to go public at a valuation in excess of $100 billion, and I have seen a figure of $150 billion mentioned by at least one analyst. Either way, the listing looks set to be an extravaganza that will trump Facebook's May 2012 IPO. That's not entirely surprising -- a company that controls an estimated 80% of the Chinese e-commerce market has a compelling, easily digestible story (as for the valuation, it could very well end up being entirely indigestible).

SanDisk's performance on the week was also driven by a favorable earnings report. Shares rose 9.4% on Thursday after the company reported first-quarter revenues and earnings per share that exceeded Wall Street's expectations. In particular, adjusted earnings per share of $1.55 were 15% above the $1.25 consensus estimate.

Those results in themselves were not enough to lift the shares (those earnings are already banked -- stock prices reflect expected future cash flows), but they are representative of improvements that are not a "one-off." While the company's guidance for revenues in the current quarter, a range of $1.55 billion to $1.625 billion was roughly in line with analysts' estimates, management lifted its gross margin target range for 2014 from 45% to 48% to a new range of 47% to 49%. The rate of growth in SanDisk's solid-state drive business (+61% in the first quarter!) is shifting the company toward a higher-margin product mix. Solid-state drives brought in more than a quarter (28%) of the company's revenues in the first quarter.

This isn't an area I feel comfortable investing in because of recurring heavy capital expenditure requirements and technology risk; however, SanDisk appears to have the wind in its sails right now in terms of business momentum.

Despite meeting analysts' consensus earnings estimates, IBM saw its shares decline 3.3% on Thursday. As at Yahoo!, CEO Ginni Rometty, who took over the reins of Big Blue in 2012, is attempting a turnaround of an iconic technology company. Unfortunately for Rometty, IBM was unable to produce revenue growth in the first quarter and has now missed analysts' revenue estimates for at least five consecutive quarters (the last time IBM managed to grow revenues was in the first quarter of 2012).

Rometty vowed to continue repositioning the company in growth areas including cloud computing, "big data," social, mobile, and security. The ongoing restructuring cost the company nearly $900 million in the first quarter.

Within the technology sector, I like IBM's business model, which is relatively predictable with high recurring revenues and low obsolescence risk. Furthermore, the shares' pedestrian price multiple of less than 10 times the next 12 months' earnings-per-share estimate sets a relatively low bar for operating performance. Nevertheless, to paraphrase former CEO Lou Gerstner, teaching this elephant a new dance is clearly no mean feat. Patient investors only, please.

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Alex Dumortier, CFA, has no position in any stocks mentioned. The Motley Fool recommends Facebook and Yahoo! and owns shares of Facebook and IBM. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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