Brewing Concerns for Apple and Qualcomm

 | Jul 21, 2013 | 5:00 PM EDT  | Comments
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intc

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qcom

If you're seeking a gauge on the tech sector this earnings, look no further than Taiwan Semiconductor Manufacturing (TSM) -- because it's now a more important indicator than Intel (INTC) is.

Intel is yoked to the slumping personal-computer market. In the June quarter, worldwide PC shipments fell for the fifth straight quarter, sliding 10.9% year over year, per market researcher Garner. When Intel reported earnings last week, no one on Wall Street was surprised that second-quarter revenue was down 5.1% from the prior year. No one was shocked that sales from Intel's PC chip business were off 7.5%, or that the company forecast flat revenue for 2013 vs. 2012.

On the other hand, contract chipmaker Taiwan Semiconductor has seen booming revenue because it serves the companies that are riding the smartphone wave: Broadcom (BRCM), Marvell Technology (MRVL) and, most important, Apple (AAPL) and Qualcomm (QCOM). Sales of chips for mobile technologies made up half of Taiwan Semiconductor's total second-quarter revenue, and those sales rose 20% from the prior quarter.

Still, the third and fourth quarters look rather gray and gloomy. The mobile-chip sector has settled into a rather defined pattern: For a company such as Taiwan Semiconductor, the second quarter marks a peak in revenue. So, as expected, the company told Wall Street that it anticipates the next two quarters will be weaker than the one it just reported.

But what was troubling -- for Taiwan Semiconductor and for smartphone companies -- was the degree of the projected decline. For the third quarter, the company expects 3%-to-5% sequential revenue growth, below the 6% analyst targets.

For the fourth quarter, the company described what I'd call a correction in demand, with an estimated sequential sales drop that should exceed last year's 7% slide. A bit of that will be due to a decrease in chip production for the PC makers, but Taiwan Semiconductor said the bulk of the worse-than-expected decline will come from a slowdown in high-end smartphone sales, and a correction at the low end of the Chinese smartphone market.

The implications for Apple and Qualcomm -- due to report earnings Tuesday and Wednesday, respectively -- aren't terribly cheery. It does look as if Wall Street has discounted part of this slowdown: Apple stock closed at $424.95 Friday, down from $463.84 on May 8 and, of course, from $702 in September 2012. Is all the bad news discounted? I doubt it. But this should be Apple's weakest quarter of the year, and after the Tuesday report we'll know more about whether the stock has put in a bottom.

Shares of Qualcomm, at their Friday close of $61.46, are off less than 10% from their $66.61 level on May 17 and from the 2013 high of $67.97 on March 5. The stock has broken below support at the 50-day moving average ($62.64) and at the 200-day moving average ($63.37) in the last few days. I'd approach Wednesday's earnings with caution.

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