Option traders were bullish on semiconductors as earnings season
began, and they haven't been disappointed.
All four key chip-related names that have released earnings beat
estimates and sounded a bullish tone on the market for their
products. Each one rallied on the reports.
Advanced Micro Devices, which makes computer processors, kept the
winning streak alive yesterday afternoon when it surpassed earnings
forecasts by nearly 100 percent on a revenue beat of $100 million.
Like rival Intel, which crushed its numbers two days earlier, AMD
also had enough confidence in future demand to provide aggressive
Earlier in the week ASML and Novellus, whose equipment is used to
make semiconductors, reported similarly strong numbers.
On one hand, the companies are benefiting from the same trend of
falling costs that have occurred across most businesses. But the
important driver that distinguishes chipmakers from other
manufacturers is that we appear to be in the midst of secular boom
for their products that could make the 1990s tech revolution look
like child's play.
One reason is the huge surge in wireless devices, which were still
in their infancy 10-15 years ago. The second reason is
globalization. In May 1999, for instance, global chip sales totaled
$11.3 billion, of which $6.1 billion occurred in the Americas and
Europe. Fast-forward 11 years to May 2010, and global sales had
more than doubled to a record $24.7 billion, but the Americas and
Europe had only inched higher to a mere $7.4 billion, according to
the Semiconductor Industry Association.
Corporate spending is another driver because companies are buying
both desktop computers and migrating their applications from
in-house servers to cloud-computing services run by companies such
as NetApp and EMC, and powered with software from companies such as
INTC's data-center segment, for instance, recorded a staggering 42
percent revenue gain versus last year. Its PC-related business grew
a more modest 31 percent.
Digital Realty Trust illustrates the strength of the trend. While
it's structured as a real-estate investment trust, its property
consists of buildings to house the same cyber clouds. This has kept
DLR immune from the other problems in the real-estate sector, and
caused its shares to rally 13 percent in the last three months
while the iShares Dow Jones U.S. Real Estate Index exchange-traded
) is down 4 percent in the same period. DLR is also trading near
its all-time highs, while the average REIT is down by almost half
since early 2007.
The market does a great job of digesting all of this information,
and it clearly sensed the positive developments in semiconductors
before the numbers were announced. Over the 20-session period ended
last Friday, call volume in the sector was 78 percent greater than
put volume. And, the calls were heavily bought rather than sold,
which indicates a strongly bullish sentiment.
Adtran showed that the bullish trend extends to the networking
sector when its second-quarter results crushed forecasts. The
shares gapped higher on Wednesday and proceeded to trade at their
highest price since late 2005.
However, the strength in technology didn't extend to Google, which
is showing both weakening top-line performance and a worrying
growth in its cost structure. Revenue beat forecasts by less than 2
percent but its earnings badly missed because its headcount surged
6 percent sequentially.
The news was similar to the headlines from Infosys, where higher
employee costs took a bite out of profitability and caused the
shares to gap lower on Wednesday. Given that the whole point of
outsourcing work to India is the access to cheap labor, this trend
could also prove a new long-term threat to the company's business
model--especially with U.S. wages stagnant.
Earnings reports will shift to big financials today as investors
digest numbers from Bank of America, Citigroup, and General
Electric, which has a large financial component. Options activity
has been the most bullish in BAC and C. Both have both seen heavy
call buying over the last month and have rallied so far in July.
(Chart courtesy of tradeMONSTER)
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