European tech companies started the confession period (page 1 of 3)

US Technology Stocks

Last week's series of company earnings releases generated mixed sentiment within various segments of the technology sector. However, much of the news was already expected, serving only to reinforce earlier slowdown propositions and an opportunity for traders to take-profits on technology issues that have run-up over the last 2 weeks. On a week-on-week basis, the NASDAQ Composite Index traded relatively flat with the index posting a marginal gain of 0.39% to close at 2781. For the week ahead, we expect the market to gain some upside momentum as short-term traders take bets for a favourable January 31 FOMC outcome. However, we continue to believe the potential exists for the market to lose buying strength and stall as we approach 3000 (significant short-term psychological index price barrier) due to further profit-taking activity.

We continue to like the fiber optic component-related segment and recommend investors target a 2H01 performance over any short-term outperformance expectations. We believe the broadband build-out will continue unabated, albeit a near-term revenue growth slowdown (from reduced IT budgets), as pent-up demand for bandwidth will only lead to a congested network and subsequently crawling speeds in Internet traffic if current capacity stagnates and is left unchecked. The broadband infrastructure build-out remains a long-term construction event. However, given the present economic growth uncertainty and the deceleration in IT spending, we advocate selectivity and conservatism in the near-term, and accumulate more only as demand visibility improves (ie 2Q01).

PMC-Sierra's (PMCS US, $74.00, CSFB rating: Downgraded to Buy) weak forward looking guidance, due to low product demand visibility, scared-off investors who ended up "dumping" the company's stock on Friday. Though PMCS reported 4Q00 earnings of $0.34 a share, which was in-line with the First Call consensus estimates, March-1Q01 EPS expectations were revised down significantly lower to $0.13 a share. 4Q00 revenues rose 152% year-on-year (yoy) to $232 million, beating expectations of $229 million. However, sales forecast for all of 2001 were also brought down to grow at only 30% yoy. With a bleak performance outlook for 1Q01, we do not recommend to buy the stock at the current time until price stabilises at around $63 and improved product demand visibility is obtained for the rest of the year.

JDS Uniphase (JDSU US, $59.625, CSFB rating: Buy) reported 2Q01 figures that were generally in-line with expectations. 2Q01 EPS (excluding acquisition costs) of $0.21 exceeded First call consensus estimates $0.19 a share. 2Q01 revenue climbed 161% yoy (+18% sequentially) but 3Q01 sales forecast were revised to a mere 7% sequential growth to reflect continued customer inventory adjustments and the near term capital spending slowdown.

Meanwhile, JDSU and SDL Inc's (SDLI US, $218.00, CSFB rating: Buy) $22 billion merger vote was delayed again (rescheduled to February 12) due to antitrust concerns. The merger completion date has been extended to the end of February as the Department of Justice evaluates JDSU's submitted remedy. Lastly, SDLI reported favourable 4Q00 earnings of $0.53 a share, surpassing consensus estimates of $0.49. Revenue advanced 199% yoy to $176 million (exceeding expectations of $171 million). While the near term growth outlook for JDSU and SDLI remains soft, we believe both companies' long-term prospects continues to look attractive as customers work down existing excess inventories to normal levels.