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Tech stocks - Wednesday, July 29, 2009

Microsoft Outdeals Yahoo and Bartz

Anyone who holds shares of Yahoo (YHOO:NASDAQ) was disappointed by today’s announced deal with Microsoft (MSFT:NASDAQ). Receiving zero dollars upfront, Yahoo will receive 88 percent of search revenue generated on its sites for the first five years of the 10-year deal. Considering that Yahoo owned 19 percent of the search market, more than double that of Microsoft, we would have thought that the big talking CEO Carol Bartz would have been able to broker a better deal with the smaller search rival. And it doesn't help that Ms. Bartz had previously said that any deal would require “boatloads of money”. Where's the money Bartz? But with Yahoo seemingly desperate for an acquisition not too long ago, Ms. Bartz only had one card to play in the company’s best asset and couldn’t have been expected to do much better.

While it’s easy to point to Microsoft as the winner in this deal as they get access to Yahoo’s best possession without having to pay any money upfront, the bigger winner in the short term will be advertisers. With the Yahoo/Microsoft team launching a formidable challenger to search king Google (GOOG:NASDAQ), advertisers can expect better rates in a much more competitive market. Microsoft won today, but advertisers will benefit in the near term.

Despite Yahoo failing to deliver a sweet deal for its investors, today’s 5-year treasury auction failing to gain much interest, and with Fed reporting that the labor market would remain soft, the Dow only lost 26 points while Nasdaq lost 8. The Fed tried to offer some hope by saying that the recession was easing in four Fed regions – Cleveland, Kansas City, New York, and San Francisco – while the rate of economic decline was slowing in Chicago and St. Louis. The Dow should have taken a major hit today on the treasury auctions and the lack of optimism in the latest beige book. But it didn't. The markets could be looking upward as investors believe there are better days ahead.

Having watched the markets show remarkable gains since March of the year, it’s easy to believe that this 5-month rally could be hitting a peak especially after seeing this quarter’s lackluster earnings reports. Revenues are down while companies are only meeting, or beating, profit expectations because they have slashed their payrolls. While we could see as much as a 5 percent correction in stock prices before they start moving much higher again. So should you sell right now? Only if you are going to take the money and invest in small-caps as the Russell 2000 should beat S&P 500 in the near term. Even if the Dow experiences a 5 percent correction, such a drop will be short lived and followed by a gain greater than the drop.

Speaking of drops, one of our favorite tech stocks, Symantec (SYMC:NASDAQ), delivered plenty of bad news today after the market closed and should experience a decent drop in share price tomorrow. Missing earnings estimates by delivering $0.34 per share versus the $0.36 per share expected, also missed on revenue expectations. Reporting revenues of $1.4 billion versus $1.5 billion, Symantec’s 13 percent drop from the same quarter in the previous year will continue to fuel pessimism in the company that is synonymous with computer security.

Symantec’s consumer segment (representing 31 percent of the company’s revenues) remained fairly strong as the division only reported a 4 percent decline in revenues from the same quarter in the previous year. Taking into account the importance of having anti-virus software, especially if you have a computer that runs a Microsoft OS, the 4 percent decline is a little surprising, but not a compelling reason to sell this stock.

The staff at tech:stocker’s area of concern is the Storage and Management segment that is currently responsible for 38 percent of the company’s revenue. This division reported a 17 percent drop in revenues from the same quarter in the previous year. As the leading business division for revenue at Symantec, we believe this division will face increasing competition from EMC (EMC:NASDAQ) with their acquisition of deduplication storage leader Data Domain, Cisco(CSCO:NASDAQ), IBM (IBM:NYSE), and Microsoft .

Almost equally disturbing is CEO Enrique Salem stating in the earnings release that their customers are focusing on shorter-term deals. Mr. Salem has extremely tough act to follow in former CEO John D. Thompson, whom we considered to be one of the strongest CEOs in Silicon Valley. While today’s earnings report has provided Mr. Salem with a great opportunity to demonstrate his leadership skills and return the company to the glory days while under Mr. Thompson, today’s earnings release suggests that better numbers won’t be appearing in the next earnings release.

Symantec needs strong leadership right now and until Mr. Salem proves that he has the ability to move the company in the right direction, we’re going to be extremely conservative with our outlook on the company despite their superior anti-virus software. We expect the company to take a hit after tomorrow’s opening bell and then would only recommend buying the stock if it drops to around $15 as our 12-month target for the company is $17 per share.