Avoid Computer Hardware Companies After Last Week's Earnings

by: Benjamin Goldman

As everyone who follows the stock market has heard, Apple (NASDAQ:AAPL) had a rare earnings miss last week, which brought its stock down from over $420 to around $390 in a week, characterized by a generally bullish market. However, Apple's missed earnings may be derived from consumers holding off on buying the iPhone 4 to wait for the release of the iPhone 4S and iPhone 5. In this article, I further delve into what last week's tech earnings mean for the future of the tech industry.

IBM beat earnings, but missed on revenue, causing its shares to significantly drop. The improved earnings, however, were driven by software sales, which are up 13 percent over the last year. Intel (NASDAQ:INTC) beat earnings estimates from sales to China for business hardware, causing its shares to beat the Nasdaq by over 3.4% from October 19 to October 21. Microsoft's earnings satisfied estimates, but shares were flat compared to a strong market. Its increased revenue and earnings stemmed mainly from business software and cloud computing. Oracle also beat earnings, and shares have increased by 13.3 percent over the past month, beating the Nasdaq by about six points.

The general trend that I see from all of these earnings reports is that business hardware and software is driving tech, while personal computer sales are continuing to decrease. One of the highest ROI investments a company can make is upgrading its systems, as an investment of a few million dollars can save billions in the long term, if the company undergoing the upgrade is profitable enough. As the world's largest corporations continue to stockpile cash, expect business software and hardware to continue to trend upwards. I suggest investing in companies like Oracle (NASDAQ:ORCL), Microsoft (NASDAQ:MSFT), IBM (NYSE:IBM) and EMC (EMC) to hold a long position in business systems.

As for consumer hardware companies, I believe that they will continue to hurt. Hardware is getting more and more competitive, and even if revenue can stay consistent, earnings will decrease, which will substantially decrease market value. I would suggest shorting Dell and Hewlett Packard to hold a short position in personal computers. I do not believe that Apple is a good short, because it plays a strong role in many aspects of its value chain, and the majority of its earnings are derived from smart phone and tablet sales, which I believe are still on the rise.

It will be interesting to follow how the tech industry performs in the next few months. I believe that tech as a whole will take a hit if Dell (NASDAQ:DELL) and HP (NYSE:HPQ) miss earnings on November 15 and November 21, respectively, but I believe the majority of tech will improve in the coming months.

Disclosure: I am long IBM, and employed by IBM.