Tech Stock Report: Oracle, Qualcomm, Palm, Micron and M-Systems

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 |  Includes: FLSH, MU, ORCL, PALM, QCOM
by: Shlomi Cohen

Two blue-chip stocks from different sectors, among the biggest in the Nasdaq 100, took the index in different directions at the end of last week. On one hand, software giant Oracle Corp. (Nasdaq:ORCL), which has a market cap of $80 billion, published its financial report and guidance, which were surprisingly good, and boosted its share almost to its peak of early 2002. On the other hand, cellular processor developer Qualcomm Inc. (Nasdaq:QCOM), which has a market cap of $66 billion, fell 10% over the week to under $40, its lowest point since October 2005, after Nokia (NYSE:NOK) announced that it would stop marketing telephones based on Qualcomm’s CDMA technology in April 2007.

Qualcomm’s problems are specific to its complex relations with Nokia, and mostly involve horse trading over the amount of royalties Nokia is prepared to Qualcomm beyond the current contract that expires in April 2007. Qualcomm’s problems are therefore unrelated to the general business climate in the telephone market.

Nokia CEO Olli-Pekka Kallasvuo just took up his post in early June, and already dropped two bombshells last week. The first was Nokia and Siemens’s (NYSE:SI) merger of their mobile and fixed-line phone network equipment businesses. The second was Nokia’s divorce from Qualcomm. Kallasvuo’s predecessor of 14 years, Jorma Ollila, was appointed chairman of Royal Dutch Shell plc (NYSE: RDS) in early June.

Oracle’s good news is a clear sign that after years of huge risky acquisitions, the company is finally seeing the fruits of its efforts, and is giving the impression that its share will go up a league from an annual price range of $10-15 to $15-20. The interesting fact about Oracle’s results was that quite a few investors and analysts claim that the results are also good news for the large enterprise software market in general, and that this market is finally seeing the first signs of renewed heavy investment in IT, after years of a dearth of investment in the wake of preparations for Y2K and the bursting of the high-tech bubble.

During a conference call, Oracle president and CFO Safra Catz, an Israeli, was asked whether the company’s aggressive guidance for the fiscal quarter ending in August was a positive sign for strong demand in the software market in general. She replied that she could not separate out reasons specific to Oracle and positive macroeconomic factors in explaining demand for Oracle software.

Catz added that Oracle was confident of its guidance of 18-25% growth in new license sales during the present fiscal quarter, compared with the corresponding quarter of 2005. She said that the number of deals in the pipeline was substantially greater, but that it was impossible to estimate how many contracts would actually be signed by the end of the quarter. “The Wall Street Journal” quotes an executive at BEA Systems Inc. (BEAS), Oracle’s competitor, saying that the company did not normally revise its guidance during the quarter, but he hinted that the company also felt a revival in investment that would have a beneficial effect on the quarter.

Bear Stearns analyst John DiFucci claims that the results of Oracle’s fourth fiscal quarter (which ended in May) were more than the usual seasonally strong results. He says that Oracle chairman and CEO Lawrence (Larry) Ellison and executives had spotted changes in the industry years ago, and formulated strategy accordingly. This strategy included the launch of technology products designed to meet managers’ new demands.

DiFucci says that company managers are now looking for software packages that will help them more efficiently manage their multiple sources of information at lower cost. He thinks that Oracle has something to offer these managers, which is why the company became a kind of strategic partner with its customers over the years. He does not believe that Oracle’s successes necessarily heralds good tiding for other large software companies, and recommends waiting another couple of weeks, during which the second quarter will come to an end and some software companies might issue warnings about a weak quarter. DiFucci give Oracle a “Buy” recommendation with a target price of $17.

Later this week, a number of technology companies are due to publish financial reports for the fiscal quarter ending in May. Among the companies that are in my portfolio, orthopedic devices maker Biomet Inc. (Nasdaq: BMET) will publish its financials on Wednesday and Palm Inc. (Nasdaq:PALM) on Thursday. Analysts expect that Biomet will report quarterly earnings per share of $0.46 on $534 million in sales. A few months ago, the company announced that it had hired a large investment house, implying that it was up for sale.

Hand-held devices and advanced telephone maker Palm will publish its financials on Thursday. The company is expected to report quarterly earnings per share of $0.23 on $402 million in sales. The company’s low share price reflects analysts’ fears about severe competition from Motorola Inc. (NYSE:MOT) following the recent launch of its Q device, as well as competition from Research In Motion Ltd. (Nasdaq:RIMM), which will also publish its financials on Thursday. Palm’s share has always responded with sharp fluctuations when the company releases its guidance for the rest of the year, and will do this time as well. On the other hand, the share’s fairly low price implies very low expectations and a pleasant surprise could send the share skyrocketing.

Other technology companies that will publish their quarterly financials are semiconductor company Micron Technology Inc. (NYSE: MU) and telecommunications equipment vendor 3Com Corp. (Nasdaq: COMS), both on Wednesday. I’m interested in Micron because it recently completed its acquisition of flash maker Lexar Media, which SanDisk Corp. (Nasdaq: SNDK) also wanted to buy. SanDisk president and CEO Dr. Eli Harari will hold a press conference in Tel Aviv on Thursday, which will put the battle of the Israeli flash memory makers back in the headlines.

I predict that by the end of the week M-Systems Flash Disk Pioneers Ltd. (Nasdaq: FLSH) will conclude its options affair in its 20F report to the US Securities and Exchange Commission (SEC). This matter has driven the company’s investors out of their minds, or at least those investors who write in the Yahoo! forum. M-Systems must file this form by June 30. The company will probably clarify the issue of its options grants, which will put the matter behind it, assuming that all is in order, unlike the cases of Comverse Technology Inc. (Nasdaq: CMVT) and Mercury Interactive Corp. (Pink Sheets:MERQ).

Published by Globes [online], Israel business news - www.globes.co.il - on June 27, 2006
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.