Fairy-tale run of Sony and Intel is definitely for real

Sony rose a phenomenal 16 per cent last week after blowout 346 per cent growth in operating profits and higher management guidance. The shares have now risen almost 50 per cent since I first flagged Sony as my favourite Japanese restructuring share more than a year ago. Sony is no longer a mass-market consumer electronics and personal computer manufacturer. Sony now dominates the global markets for sensors and digital cameras, the ballast for next-gen phones, cars and factories. For instance, Sony supplies the Apple iPhone X's 12MP camera and sensors for its Face ID feature. The PlayStation 4 sales cycle is robust as gaming revenues rose 35 per cent year-on-year with rising margins. Semiconductor/components are a 20 per cent growth business thanks to the phenomenal potential of the global smartphone market. Sony has restructured its Hollywood movie studio and music publishing business and exited dozens of marginal electronic markets. I envision Sony ADR at $52 and the Japanese shares at ¥6,000 (Dh198.18) by mid-2018. This is one Japanese technology firm that embodies the new cult of "shareholder value" all too rare in Marounuchi.

Intel shares rose a fabulous 34 per cent in the past eight weeks, making it a megacap fairy tale on the Nasdaq. True, Intel overpaid for Mobileye (though not Altera) and the PC market is ex-growth yet its third-quarter reports show rising operating margins, cost discipline and growth in memory chips. Intel is integrating Altera and Mobileye across its different product platforms. Cost discipline is the new mantra at Intel. Intel is still undervalued at 15 times forward earnings and can well rise to $54-$56 in 2018. When technology firms successfully restructure, investors hit paydirt.

The 30-40 per cent rise in mega-cap technology shares in 2017 has resurrected memories of the ill-fated 1999-2000 tech bubble and bust in Silicon Valley. Retail speculation is nowhere near what it was in 1999, when the cult of the day trade and surreal IPOs (remember Globe.com and Pets.com?) reigned supreme. The stellar performance of companies like Microsoft, Intel, Amazon and Google are linked to above consensus growth in earnings, not just money flows. Interest rates are far lower than in 1999. Tech sector valuations, while not cheap, are not looney-tune expensive either at 18 times forward earnings for at least 15 per cent EPS growth.

China and India were nowhere near the economic colossi in 1999, they are now. True, there are pockets of absurd valuations and speculative manias - in Tesla, Netflix, etc, definitely scare me. The law of large numbers will stunt growth for the Nasdaq's biggest success: Amazon, whose $160 billion in revenue will be difficult to replicate in the next decade. Apart from Prime, Amazon's e-commerce business (food retailing? Pharmacy? Video streaming?) still does not make money. When the stock market decides Emperor Bezos wears no clothes, all bets are off on Amazon. Facebook, Apple and Google generate fabulous cash flows and have valuation metrics I can justify relative to their proven growth models, though at prices that are 20-25 per cent below current quotes. Yet it is impossible to use valuation paradigms to analyse Amazon, Netflix and Tesla.

There is also the increasing danger of regulatory risks in both the US and Europe as governments increasingly target Big Tech for antitrust or tax-avoidance issues.

The European Commission is concerned that Google has a 85-90 per cent stranglehold on the European search and mobile operating system market. Brussels slapped a ?2.4 billion fine on Google for alleged online placement manipulation. After all, Uncle Sam's trust busters once broke up John D. Rockefeller's Standard Oil and AT&T on competition concerns. Could the same fate befall Google or Facebook, who unquestionably enjoy monopoly power in their markets? Recent concerns about Russian cyber-hacking and concern about abuse of online personnel data mean public policy will soon demand the regulators tighten their noose around Silicon Valley. Washington's antitrust lawsuits against IBM and Microsoft could be the future for the FabFour (FANG) of the Nasdaq. If the Justice Department targets Silicon Valley, the technology bull market's ascent will end. A populist America historically-distressed concentrations of power and the ultimate populist won the White House in the last US election.

Source: Khaleej Times