Linear Isn't Trading its Fundamentals

 | Jan 14, 2014 | 2:00 PM EST
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Several tech companies report this week and I want to take a quick look at the most interesting stories.

Linear Technology (LLTC) reports second quarter fiscal 2014 on Wednesday. If you recall, the first quarter was nothing to write home about. The company said revenue in the September quarter rose 2% to $340.4 million. That was less than a half a percent above the consensus estimate. The first quarter was unusually dependent on the auto business. Nineteen percent of bookings came from autos, an all time high.

On the last conference call, management warned investors the 16-day government shutdown would materially impact the second quarter. Management guided revenue for the second quarter to be flat to down 4% sequentially, or $327 million to $340 million. The range was below the consensus forecast of $343 million.

Analysts took a chainsaw to their estimates. Right now, the consensus is $340 million, but that's still above management's mean guidance of $333 million.

For the year, analysts are expecting just 8% revenue growth and a little less than 10% for next year. Yet for the one-year period ending Monday, the stock is up 27%.

Most of the stock performance has come from the announcement that Linear would partner with Xively in a bid to accelerate the availability of ultra-low powered cloud-connected devices.

The so-called "Internet of Everything" got a big boost after Google (GOOG) announced on Monday night it had bought Nest, the privately-held thermostat company, for $3.2 billion.

Investors are hoping Linear Technology's micro sensor technology will be imbedded in billions of devices that are connected to the Internet. Some analysts estimate there could be as many 18 billion sensors deployed by 2018. These sensors would be in everything -- your home, car and even in your clothing. These chips would report back to your cell phone or desktop thru a Wi-Fi connection.

For example, a GPS device in Ford's (F) new F-150 truck  reports your location back to Ford's headquarters. The technology could be used to dispatch a repair vehicle or notify Starbucks (SBUX) to get your order ready. Homeowners can control their alarm system and garage door from their cell phone using technology very similar to this. Who knows, maybe this time next year, your refrigerator will tell you you're out of cilantro?

Clearly, the "Internet of Everything" has caught investor's imagination, because LLTC does not trade its fundamentals. For fiscal 2014, analysts think the company can earn $1.91 and $2.21 next year, which means the stock trades at 23x this year and 20x next years earnings. That's pretty expensive for a boring semiconductor maker with single digit growth.

Without last October's announcement, this stock would be flat on its back. The Nest announcement, however, probably would be enough to juice the stock for a while longer. I would sell it into any move higher.

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