3 Takeaways for Technology Investors This Earnings Season
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Most of the names in the technology space have reported their quarterly numbers and the results have been disappointing. Growing competition is squeezing margins and a drought of new product launches has left investors with little to get excited about. Here're are the top three takeaways from the second quarter.
The death of the PC
The dire fate of the PC industry is old news. Ever since the arrival of the Apple's (NASDAQ: AAPL) iPad, the Wintel empire has been under siege from the rise of mobile devices. Numbers from research firm IDC and Gartner showed global second quarter PC shipments fell 11% year-over-year dragged down by sluggish demand in China and Europe.
But what we did learn this earnings season is just how difficult the transition to mobile has been for the old tech guard.
Microsoft (NASDAQ: MSFT) took a $900 million write-down on its Surface RT tablets. The poor launch was blamed on a memory hogging operating system, a high retail price, and lack of apps. The company is also struggling to gain much traction in smartphones. According to May data from ComScore, Windows has carved out only 3% of the U.S. smartphone market.
Intel, the world's largest chip manufacturer, backtracked its earlier sales guidance. After projecting growing revenues despite its declining PC business, management now expects sales to remain flat this year. The restatement is an admission that Intel chips aren't making their way into smartphone and tablet devices. Manufacturers haven't made the switch because Intel's Clover Trail product doesn't offer a significant cost advantage over rival ARM.
Mobile is the future and the old guard can't adapt.
Mobile is dead
Wait...what? Yes, early signs suggest the mobile device boom is coming to an end.
Samsung's earnings guidance fell short of analysts expectations. Investors are raising doubts that the company will be able to maintain its rapid growth rate and are concerned that higher marketing costs are eating into the company's margins.
Apple's iPad sales dropped 14%. And while iPhone unit sales shattered the Street's expectations, the average selling price of each phone dropped significantly as consumers gravitate to the company's older iPhone 4 rather than its flagship iPhone 5.
This is classic late adopter behavior where consumers choose lower priced devices over new features and quality. It's evident that we're entering into the second phase of the smartphone product life-cycle, which is typically marked by falling growth rates and paper thin margins.
Second-tier players without well defined product ecosystems are struggling even worse. Nokia's revenues fell 24% year-over-year. BlackBerry sold only 2.7 million BB10 devices which fell well short of Wall Street's low expectations.
Based on this troubling trend, investors should avoid hardware companies and focus on names with services and apps that can profit growing mobile traffic.
No one has figured out mobile
That is if the technology giants could get a handle on mobile advertising.
Google (NASDAQ: GOOG) reported a disappointing quarter with cost-per-click rates - an indicator of how much an advertiser pays every time a user clicks on an ad - falling 6%. This marked the seventh consecutive quarterly decline in the company's cost-per-click metric. This drop is mostly due to the growing shift to mobile where ads sell for 40% less than desktop searches. What's troubling is that these declines are accelerating in spite of the company's revamped mobile strategy.
Yahoo! too saw declines with search cost-per-click rates falling 8% due to weaker mobile ad rates.
It seems mobile is technology industry's El Dorado.
Now everything above holds true with one exception - Facebook (NASDAQ: FB). During the second quarter mobile represented 41% of Facebook's $1.6 billion advertising revenue. Daily active mobile users and cost-per-click rates were up 27% and 41% respectively from the previous quarter. This is particularly impressive because at this time last year the company didn't even have a mobile strategy.
How did the company engineer such an impressive turnaround? It was a case of some serious dogfooding - using your own product in order to learn more about your own product. Earlier this year, Facebook internally blocked employees from using the desktop version of the social network. The moved worked. Forcing developers to use the mobile app resulted in big improvements to the smartphone and tablet experience.
Based on a report from eMarketer, Google controls 51% of U.S. mobile ad spending versus 15% at Facebook. But after the results from this quarter, expect Facebook to take a bigger slice of that pie.
Foolish bottom line
It has been a tough summer for technology investors but fortunately there's a lot to look forward to this coming fall. Apple is expected to release a new iPad mini tablet and iPhone 5S. Speculation is also building that the company may even announce the much anticipated iWatch. Microsoft is also set to reinvent the living room with the roll-out of its Xbox One. All of these launches represent catalysts that could drive tech shares higher.
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Robert Baillieul has no position in any stocks mentioned. The Motley Fool recommends Apple, Facebook, and Google. The Motley Fool owns shares of Apple, Facebook, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!