Catching The 'Fifth Wave' of Tech -- But Heading For A Wipeout? (MSFT, CSCO, INTC, QCOM, AAPL, VZ)

by: The Stalwart

The Stalwart submits: In October, Om wrote about the comeback in tech, whereby moribund companies are starting to show a little growth again. But this wave is mainly marked by transformation growth on the edges, like the consumer areas:

It is a bottom up swing, as we highlighted in our last story, The Fifth Wave. Broadband, Wireless, Consumer Electronics, and other such trends are the forces of change. People are looking at folks like Microsoft and Cisco, when they should be focused on Qualcomm, Apple and Verizon Wireless.

Events of the past week vindicate this idea further, as Microsoft, Cisco, and Intel are all trying to cash in on this trend.

But will it cost them too much?

On Friday, Cisco announced it would spend nearly $7 Billion, over 20 times forward earnings, to buy out set-top box maker Scientific Atlanta. This move will bolster their consumer presence (along with Linksys) and will allow them to complete the so-called triple-play of Data, Voice, and now Video. The merger hasn't, however, pleased the street:

Banc of America Securities analyst Tim Long said he still feels "mixed on the deal" for Cisco Systems to acquire Scientific-Atlanta. He lowered the price target on Cisco.

Long said in a research report: "While we see the benefits of the deal from a convergence standpoint, we do not believe that the growth rate will improve, making it even harder for overall Cisco to grow in excess of 10%."

The move is "logical and smart," but Long said he is concerned with lackluster performance from Cisco's growth areas in the past few quarters and the Scientific-Atlanta integration risk. Long lowered Cisco's 12-month price target to $20 from $22.

Microsoft has also had a busy week on the consumer front with the launch of the XBOX 360, and the continued build-out of their Windows Live internet applications portal.

And Yesterday, Intel announced a chip-deal with Micron to produce NAND flash, a direct stab at the consumer market with all its camera/mp3 player/PDA hotness. Again though, is the cost worth it? Here's one analyst who has downgraded the stock:

"While we appreciate Intel's efforts to grow its presence in the consumer electronics end market, we are cautious on the company increasing its exposure to commodity NAND flash memory," J.P. Morgan analyst Chris Danely wrote in a recent report. "We believe Micron gross margins for its NAND business were roughly 20% in its most recent quarter, well below Intel's gross margins of 61%."

That's a pretty big margin sacrifice to get in on Wall St.'s latest infatuation.

So, the question is, does Wall St. not get the Fifth Wave, or are maturing companies simply paying too much to get in on the good action?

Sorry, no easy answer here. It's hard to say how much of this consumer-driven growth is based on a secular shift (the wave) and how much it's being fueled by the same factors driving people to spend $800 on a pair of jeans: low interest rates, rising home values, cheap money. If it's the former, then I trust the tech companies to judge the value of these areas. If it's that latter, I'm far more worried about these moves.