Tech Bulls Focus on Chips and Storage

It's earnings season, and the bulls are running. And that has pretty much been the case for tech stocks. Looking forward, investors searching for the tech sectors likely to show the greatest stamina in the quarters ahead should wave their red capes and tag semiconductor and computer storage/peripheral stocks.

That's what Wall Street matadors are doing.

Since earnings season kicked off several weeks ago, analysts have raised their second-quarter earnings estimates for chipmakers by 12.5% to $4.5 billion, compared to $4 billion on Apr. 1, according to Thomson Reuters, which surveys analysts estimates.

No Flash in the Pan

Computer storage and peripherals companies snagged a 5% increase to $1.25 billion, up from analysts' second-quarter projections of $1.19 billion on Apr. 1. These increases to quarterly estimates aren't a flash in the pan.

Chip companies from Intel (INTC), with a stellar quarter under its belt, to Advanced Micro Devices (AMD), which surprised the Street, to major chip-equipment supplier Applied Materials (AMAT) have all received healthy increases to their quarterly estimates that extend beyond the current quarter and into next year.

Sizzling sales of chip-dependent cell phones and PCs, especially in emerging markets, are brightening the outlook for this slice of tech companies, according to analysts and reports from the closely watched Semiconductor Industry Association.

Flipping From Loss to Profit

Semiconductor-equipment sales, for example, were strong in Taiwan in March, growing 24% sequentially. That month-over-month performance was above the typical 19.6% seasonal growth, noted Credit Suisse analyst John Pitzer in a research report.

AMD surprised Wall Street when it reported its March quarter results, snaring a profit instead of an expected loss. That performance led to analysts flipping their quarterly loss estimates for the remainder of the year into forecasts of positive earnings gains of 6 cents vs. a loss of 9 cents in the second quarter; a positive 11 cents compared with a 3 cent loss in the third quarter; and strong earnings of 41 cents a share for the entire year vs. a loss of 19 cents, according to Thomson Reuters.

Computer storage and peripheral companies also attracted stronger analyst enthusiasm. Storage businesses like behemoth EMC (EMC) and Teradata (TDC) are expected to benefit as companies loosen their purse strings to replace dated equipment and expand capacity to satisfy their customers' ever-growing need to retain data.

Bill Shope, a Credit Suisse analyst, noted in an EMC report: "We believe demand remained healthy as corporations continued to refresh their installed bases, and we continue to believe the company's leaner cost structure and new products will driver greater-than-expected leverage in 2010."

EMC's earnings estimates have risen by a penny for both the second and third quarters, compared to where they stood a month ago. And for the full year, it's been raised by 5 cents to $1.19 a share and by 6 cents to $1.36 in the following year, according to Thomson Reuters.

Google's Momentum

While chipmakers and storage/peripherals companies are the standouts in higher earnings projections, Internet software businesses are worth watching too. These companies received an upward revision of second-quarter earnings estimates of 1.8% to $2.9 billion, compared with estimates of $2.85 billion on Apr. 1. But the more impressive figure is the sector's second-quarter year-to-year growth comparison of 19%.

"The biggest year-to-year jump at an industry level for tech is with Internet software," says John Butters, director of U.S. earnings research for Thomson Reuters.

Google (GOOG), in particular, played a big role in that jump.

The search giant, which had a blow-out first quarter, has seen its earnings estimates jump by double digits. Analysts now expect Google to earn $6.59 a share in the second quarter, up by 14 cents from previous estimates; $6.91 a share in the third quarter -- a 12 cent increase; and $27.84 a share for the full year, a jump of 43 cents from what analysts expected on Apr. 1.

Aiding Google's momentum are expectations that its mobile phone operating system, Android, will gain greater market share over the next 12 to 24 months among cell-phone makers, which are looking for a rival to Apple's omnipresent iPhone.

"Nearing Peak-Level Earnings"

Overall, Wall Street is feeling bullish on tech stocks, pushing its second-quarter year-over-year earnings-growth expectations to 60%, compared with a forecast of 49% on Apr. 1, Butters notes. The tech sector to date has reported first-quarter earnings of $33 billion, its second-highest level, and generated $39 billion in the fourth quarter.

Says Butters: "We're nearing peak-level earnings. The growth rates are as high as they were in late 2002 and early 2003." Back in the third quarter of 2003, tech earnings skyrocketed 97% over the previous year to $12.6 billion, as the economy regained strength from its bleak period a couple years prior.

Going forward, Wall Street is once again feeling bullish. Analysts increased their tech earnings-growth outlook to year-over-year gains of 47% for the second quarter, compared with expectations of a 43% back on Apr. 1. Third-quarter estimates now stand at a 24% growth rate, up from a 21% projection, and the year-end has been rejiggered to 31% growth vs. 27% on Apr. 1.

With those expectations, are you ready to grab the bull by the horns?