By David Russell
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 (AMD), 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 (INTC), which crushed its numbers two days earlier, AMD also had enough confidence in future demand to provide aggressive guidance.
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 (NTAP) and EMC (EMC), and powered with software from companies such as VMware (VMW).
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 (DLR) 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 US Real Estate Index exchange-traded fund (IYR) 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 (ADTN) 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 (GOOG), 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 (INFY), 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 US wages stagnant.
Earnings reports will shift to big financials today as investors digest numbers from Bank of America (BAC), Citigroup (C), and General Electric (GE), 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.
Disclosure: No positions