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Tech stocks - Wednesday, October 22, 2008

The Only Thing Better Than Yahoo! Breaking Even Is Apple's Profits

With bailout money on the way, the staff at tech:stocker is constantly receiving emails wondering who we like in the financial services/banking industry. Recently we've stated that we like Wells Fargo (WFC:NYSE) because of their acquisition of Wachovia (even though they will have to exchange quite a few shares of stock to get rid of some awful mortgages on Wachovia's books) while former pick U.S. Bancorp (USB:NYSE) disappointed us with lousy earnings, we still think they are one of the better positioned regional banks (if you call a bank having branches in 24 states a "regional bank") for the long term.

To evaluate the rest, we're going to wait and see how much money each bank and financial services firm accepts from the government. Firms that surrender more stock to Uncle Sam than their counterparts will not be targets of our investment dollars in the near future. Banks and financial firms won't receive a financial boost from the U.S. Treasury and the tech:stocker staff.

And coming back to the tech industry, we were actually pleasantly surprised that Yahoo! (YHOO:NASDAQ) met expectations. Even better was news that they were laying off 10 percent of their workforce or roughly 1,500 people. While we don't revel in watching people head to the employment office, we do applaud President Sue Decker (there's no way CEO Jerry Yang has the business acumen, or heart, to layoff that many people) for being proactive in trying to keep the company in the black despite economic challenges.

Even though we appreciate the layoffs and decent quarter, the only way we could give Yahoo! a strong buy rating would be if we knew for certain that Microsoft (MSFT:NASDAQ) CEO Steve Ballmer was going to present a $20 per share offer to Mr. Yang in the next few months. Making an investment in Yahoo! based on a Microsoft "Christmas Miracle" saving investors is a long shot and that could help investors forget the horrible losses from the previous quarter. Still, even though we respect Yahoo! for layoffs, we don't see this as a positive sign that the company is going to have a strong quarter. If you bet on the Tampa Bay Rays to win the World Series back in April, investing in Yahoo! might be for you.

While Yahoo! is only for the true risk takers, Apple's (AAPL:NASDAQ) fiscal fourth quarter earnings report leaves us wondering what to do. On the positive, we're excited about the sales of the iPhone. We predicted that iPhone sales would reach 10 million this year back in July. This prediction will come true by the end of the year. Despite some negative comments, we like the iPhone as many buyers do not own a Mac but they love the phone. After experimenting with iTunes and the Apps Store a few times, new iPhone buyers are quickly hooked and providing a solid revenue stream for CEO Steve Jobs. And we strongly believe that iPhone sales lead to purchases of stronger Apple products like the MacBook and the MacBook Pro.

With the economy expected to play the role of the Grinch this Christmas, we expect sales of Apple's new computers to suffer. But, the iPhone could be the tech chic gift this year with its $200 price tag (we were thinking this could be the Blue Ray DVD player but less people are going to want to adopt a new technology in a stagnant economy. Not even the release of "Sleeping Beauty" on Blue Ray is going to sway us this year). But, iPhone sales aren't going to replace the profits lost by underachieving MacBook and MacBook Pro sales.

We still like Apple, even though they dropped their guidance for the upcoming quarter. Mr. Jobs sandbagged many investors last quarter and we think they'll do the same with this quarter. The results probably won't be as spectacular, but they should be solid. We still recommend buying Apple but don't overweight it in the portfolio.