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 (UNKNOWN:SNDK.DL) (+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.