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The Great Vista Inspired PC Boom (or not)

Saturday, February 17, 2007 | 09:26 AM

in Corporate Management | Earnings | Investing | Markets | Technology

A few weeks ago, we sent to subscribers a warning that all is not well in techland, especially with Microsoft. It is now published on the blog, Looking at Technology: Caution is Warranted

That view turns out to be confirmed one Steven Ballmer, the CEO of Microsoft. This past week, he "gathered together a group of analysts who cover that software colossus to fill them in on the recent debut of its new version of Windows, dubbed Vista, and what the future holds in store for it and his company."

Alan Abelson addressed this very issue in the latest Barron's. He notes that "Money, it turns out, can buy everything -- except a boffo launch of a new software product. The electronic retailers primed to accommodate hordes hungry for Vista banging on their doors too often, instead, found the thin ranks of their sales help outnumbering those of their customers. Kind of like throwing a party and the guests all show up disguised as invisible people."

Much of the big move off the lows in MSFT were based on the upgrade cycle in Vista -- one that turns out to be noticably absent from the sales data:

"Now, we don't want to give you the impression that Vista has been a total dud. It hasn't been, except in terms of living up to extraordinarily extravagant expectations whipped up by all the hoopla. Despite the eerily muted opening day (all the noise pretty much was supplied by the company's poobahs and their subalterns), sales should gradually gather strength as this year rolls on and next year, as well. But, pure and simple, it grieves us to say, Vista doesn't stack up as the mighty blockbuster investors and geeks alike supposedly had been panting for."

A few other factors worth noting: Mr. Ballmer cautioned against anyone out there being "somewhat too bullish." He was distinctly wary that Vista might trigger a new PC boom. For those who like to argue that sector rallies precede fundamental gains, pray tell what the lack of buoyancy in the stocks of HP, Dell and Intel suggest as to the Vista adaption cycle?

Abelson goes on to quote from the very skeptical Fred Hickey as to what we should expect from the rest of Tech:

"Fred Hickey, proprietor of the High-Tech Strategist and treasured Roundtable member, had very low expectations for Vista and, as far as he's concerned, they've already been fully met. As is not uncommon with Fred, he put his money where his mouth is, buying put options on Microsoft ahead of the product's splashy introduction, and has the profits to prove it.

We chatted with Fred on Friday, and he remains very much of a mind, as he wrote earlier this month in his newsletter, that Vista is "not an epic disaster for Microsoft" because "ultimately, businesses and consumers will resume their regular upgrade patterns and buy PCs that come pre-loaded with Vista." However, he's convinced its effect on the "PC food chain" stacks up as another and very much sadder story.

Spurred in part by a study commissioned by Microsoft that concluded Vista would generate $72 billion in related hardware, software and service revenue, Fred relates, what he calls the PC food chain -- distributors, resellers and solutions providers -- went wild and hugely overbuilt in preparation for a post-Vista release boom that is clearly not coming.

The result, sighs Fred, is that through the length and breadth of the industry, from semiconductor companies to electronic retailers, there has been a massive inventory build-up -- which, he contends, is a prelude to a disaster. He suspects that the first tremors of real trouble will be felt a few weeks hence, when some dismal earnings forecasts begin to seep out.

What confounds him and could greatly exacerbate a collapse in techs is that investors continue bullish on them despite six long years of underperformance by the sector. Besides Microsoft, his most recent published list of stocks he's negative on includes Best Buy, CDW, SanDisk, Texas Instruments, Lam Research, KLA-Tencor, Nvidia, Research in Motion, Apple, Microchip Technology, STMicroelectronics, Amazon.com, International Rectifier, Dell, Novellus Systems, Xilinx, Motorola, Applied Materials, NetLogic Microsystems and Fairchild Semiconductor."

Ouch.

Source:
Goldilocks in Drag
ALAN ABELSON
Barron's February 19, 2007
http://online.barrons.com/article/SB117167292470711833.html

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Comments

Fred mentioned SNDK.

SNDK came out with a well timed warning last night after the bell. Funny how companies release horrible news on a Friday after the bell going into a three day weekend, yet great news is often released on Monday or Tuesday morning before the bell. Whatever.

Anyway, SNDK, MU, and Samsung built way too much NAND capacity. They're all drastically cutting prices to maintain market share. Gross margins are shriveling up. So SNDK announces it is planning to cut 10% of its work force, freeze executive pay and take other drastic steps in an attempt to retain market share and restore competitiveness.

The after-hours trading in SNDK was telling. The stock closed the regular trading session within a couple of dollars of its 52 week low. My intitial reaction was investors would bid the stock up in after hours believing SNDK was taking aggressive steps to alleviate the inventory imbalance and get its cost structure in-line. Instead they dumped it and sent it almost $3 lower. Guess expectations weren't washed out enough.

Posted by: S | Feb 17, 2007 12:11:30 PM

Microsoft could change this. They could stop fixing the holes and viruses in their old system, forcing us to upgrade to keep our systems from crashing. Let's hope they dont think of it. After how they treated Netscape, and how they polluted Java, I wouldn't put it past them.

Posted by: Lori | Feb 17, 2007 12:17:40 PM

I EXPECT a computer to come with an operating system, and vice-versa. An operating system is not a separate purchase, a new toy, or an end in itself. I don't buy a computer to marvel at the glory of its operating system; I buy it to run programs. The more invisible the operating system, the better it is.
Since computers are now commodities, so are operating systems.

Posted by: wally | Feb 17, 2007 12:46:54 PM

My IT knowledge is out of date but intuitively I suspect that ,when the technological history of this period is written, Vista will be seen as a bridge to far. One last attempt to have huge amounts of code on hundreds of millions of hard drives when most should reside on network servers. IMO, the next "big picture" in IT will be an open source, network resident operating system.

Posted by: Jim | Feb 17, 2007 12:53:49 PM

My wife just got a new computer at the office w/ Vista. She has been cursing Microsoft like a sailor ever since.

I heard, too, that Dell was selling Vista on lower-priced laptops that failed to meet the minimum hardware requirements... and that even computers in line with the requirements have issues with running slow.

After a quick check of Dell.com, it appears they are now offering a choice between Vista and XP for their latitude notebooks. Hmmm.

Wonder how many people who heard bad things have said "forget that bloated Vista crap, give me XP."

Posted by: trader75 | Feb 17, 2007 1:17:17 PM

Lori...msft recently announced that extended support for xp will continue through early '14. Since security support is the only thing that you need from msft for a home system you are wise to get an xp system because...the vista aero interface is a silly gimmick, and when a silly gimmick requires half of your system resources it becomes a stupid silly gimmick, and that is exactly what vista with aero is, a stupid silly gimmick.

Incidentally, anyone here know of a major (or not so major) retailer still selling some remaining xp desktops??? Would like to pick up one or two myself.

Posted by: esbisworried | Feb 17, 2007 1:40:31 PM

"Wednesday June 16, 2004: Fred Hickey writes the respected High-Tech Strategist Newsletter. He's a bear. Always has been. This month's newsletter is more persuasive than usual. He argues:

+ The housing bubble is burst.
+ The Chinese economy is slowing down.
+ The stockmarket has soared from its low of 14 months ago. Nasdaq is up a "massive" 55%. Dow is up 2,700 points. That's more than enough.
+ There is so little fear in the market that it's at a near decade low. This is bad sign. [Vix last night was 15.]
+ There is inflation. The government "has utilized all kinds of creative means ... to hide the resulting rise in inflation in the official CPI releases. They're using imputed rents (up 2%), instead of actual house prices (up 8%), reported medical care costs at just 2%, versus the real double digit increases seen in health insurance."
+ The Department of Labor's Bureau of Labor Statistics (BLS) is essentially faking its statistics for this election year. Asks Hickey, "What's different in this world that has caused this [recent] turnaround in job creation in just a matter of months (other than the upcoming election)? Not much. What has changed is the BLS's estimate of new jobs from a category called Net Birth/Death adjustment. Essentially, the BLS has adjusted upward (dramatically) its estimate each month of the number of new jobs created from its estimate of the number of new businesses created (also known as births). The BLS describes this "estimation procedure" on its website (Click here.) The BLS also serves up the following caveat there regarding the birth/death estimations: "The most significant potential drawback to this or any model-based approach is that time series modeling assumes a predictable continuation of historical patterns and relationships and therefore is likely to have some difficulty producing reliable estimates at economic turning points or during periods when there are sudden changes in trend." Points out Hickey, "Over the last four months of 2003, the jobs estimated from the birth/death model totaled to 170,000. Over the past four months in 2004, the estimate is 733,000, or 71% of the 1,030,000 jobs the economy has supposedly created." Hickey sums this fakery up: "The job numbers reported each month are supposedly counted numbers. At least 71% of the recent new jobs created clearly are not."
+ Last year's back-to-school sales of PCs were boosted by tax rebate checks. That won't happen this year.
+ He concludes, "Some of the smarter money is likely getting out, while the getting's good. The current stalemate [see my column yesterday] may be the calm before the storm. The storm will come when it becomes clear to most that the economy is once again faltering, the secular bear market has returned to complete its work, the purge of excess tech capacities and inventories has resume and overpriced tech stocks are not a safe option for one's retirement funds."

Hickey has large positions in short-term government bonds of Australia, New Zealand and Canada, which he intends to hold until maturity. He also has large positions in Newmont Mining and Pan American Silver [neither of which are doing especially well.] He also has puts on STMicroelectronics, Texas Instruments, Fairchild Semiconductor, Qualcomm, Research in Motion, Dell, CDW, Capital One and eBay."

LMAO!

Posted by: Larry Nusbaum | Feb 17, 2007 2:08:30 PM

"Wednesday, February 9, 2005: Hickey's recommendations are predictably bearish. Fred Hickey writes the High-Tech Strategist newsletter. What makes his bearish predictions more credible this time are his extensive research and his quoting company after company reporting downturns in sales. There's too much detail for this column. Suffice, Hickey owns put options on Best Buy, CDW, Dell, Hewlett-Packard, Lexmark, Amazon, eBay, Google, Applied Materials, KLA-Tencor, Texas Instruments, Research in Motion, Intel, Countrywide Financial, Capital One and IBM."

still bearish. lol...........

Posted by: Larry Nusbaum | Feb 17, 2007 2:10:47 PM

If we go back:

- Windows 95 was a huge leap from Windows 3.11 going to 32-bit.

- Windows 98 to Windows XP, again a huge leap and completed the transition to the more secure NT file structure.

- Windows XP to Windows Vista. Meh....maybe for the security enhancements.

Vista just seems like a layover much like was Windows 98. Then it's on to the next really big thing. But this cycle looks to be much longer.

Hopefully, by the next cycle open-source OS's will be de rigeur.

Posted by: K-Dawg | Feb 17, 2007 2:12:16 PM

"Shorts which Fred Hickey has: His October 2005 newsletter shows he is short (or has puts on) Intel, Best Buy, CDW, IBM, Google, KLA-Tencor, Netlogic Microsystems (NETL), Dell, Amazon, Apple, Texas Instruments, Business Objects (BOBJ), Hyperion Solutions (HYSL), Toll Brothers (TOL), Goldman Sachs, Lehman Brothers (LEH), Capital One Financial (COF) and Countrywide Financial (CFC). His largest put option is Research in Motion (RIMM), whose management has recently become desperate -- and announced a big share buyback. I say "desperate" because it means the poor management doesn't have the imagination to think of ways to improve their product. I wish they'd ask their customers (like me). I'd give them 734."

Wow, still short and still buying puts and the end of 2005....

Posted by: Larry Nusbaum | Feb 17, 2007 2:20:20 PM

"Vista." Is that Esperanto for "Windows ME?"

When the next new operating system comes out from Microsoft it will have a new filestructure, HIL core search engine, permissions and user level installs. What we have here is a major UI upgrade to Server 2003 or if you wish, a mashup of XP and Server.

The only modern parallel that comes to mind is the US auto industry just prior to the Japanese invasion.

Posted by: Robert Coté | Feb 17, 2007 2:29:03 PM

Larry, sometimes when Ableson writes about and quotes people in his column, it takes awhile for things to play out. Someone correct me if I'm wrong, but I think he wrote a column about 3 years ago concerning Samsung entering the flash memory market and creating a glut. Also, if "memory" serves me correct, I think around 1995, he wrote about Conseco Insurance and creative financing. Darn if that stock didn't double or triple in the next 4 years before declaring bankruptcy. And of course, he was writing about the stock bubble for quite awhile before it finally cratered. In any event, I think you would agree that Ableson is a very funny and talented man.

Posted by: Teddy | Feb 17, 2007 2:52:12 PM

If Google online doc usage reaches a critical mass where the network effect makes it explode, we might see the network computing model really take off. That will break the OS/Office stranglehold (unless MS gets people to quickly migrate storage online).

After that, the most powerful computers at home will be our gaming consoles.

Posted by: wunsacon | Feb 17, 2007 3:44:26 PM

The bottom line is that there is no compelling need to upgrade to Vista. Windows XP is stable and until the PC gives out, most folks won't get a new PC that comes with Vista...

Posted by: muckdog | Feb 17, 2007 3:49:49 PM

We used to call network-resident OS's time-sharing but decided to rename it to client-server to be current and cool. Oops missed a decade or two. Vista is really bloatware which requires a huge new machine but doesn't deliver significant new functionalities. That it's 5 years late and all the cool, i.e. major enhancements, got stripped off by bad execution should be scary to lots of people in Redmond. Linux is capable today of, and does, the server role and the desktop but is limited by geekiness and market barriers in the latter. However Vista's short-comings open up all sorts of opps. If I were running an IT shop I'd be seriously looking at migrating asap to a Linux/Linux or Linxu/Max OSX server/client environment. Particularly given the power and generalities of OpenOffce.

As an investor you might want to ask if MSFT has gotten the scelrosis disease of not being able to get out of it's own way. It certainly has had major problems opening up news lines of business. And it's core has been under threat which may accelrate as above.

Posted by: dblwyo | Feb 17, 2007 5:19:24 PM

Exactly!

Posted by: Barry Ritholtz | Feb 17, 2007 5:31:11 PM

Re: Vista

Finally, I am running Vista Ultimate 64-bit on my recently build (ASUS motherboard, Intel Core 2 Duo – 2.4GHz x 2; 4 GB RAM; Radeon X1950) computer. Installation was a breeze. It is pretty and sleek, fast and stable, and it is definitely better than XP and Mac OS. Internet seems a bit faster (Vista coding is optimized for broadband, XP's was not). Bottom line, everything seems to be rock solid stable so far and it is a great purchase at a great price ($200 for OEM Vista Ultimate 64-bit). It just kicked Mac OS (and their hardware monopoly) to the curb and down the drain. It means aggravation from Mac fan boys will soon cease.
Was it worth it? Yes!

Re: Microsoft Office 2007

All programs of the suite are incredible. Its new interface (I like black in particular) is amazing and easy to use, preferably on screens 17+. The new user interface makes creating documents fast, and improving the layout and quality of your documents even faster. Overall, a great upgrade from office 2003!
Was it worth it? Yes!

Re: SanDisk

SanDisk seems to be synonymous with huge reliability problems! Both of my 4GB Cruzer U3 Smart died within a month of purchase. I will not touch SanDisk products or SanDisk stock for a while.
Was it worth it? No! I want my $250 back!

As far as all the tech stocks, I think all of them are overvalued. I would trade them but I would not hold them.

Posted by: V L | Feb 17, 2007 6:44:36 PM

I thought the Vista interface WAS Mac OS....

;^)

Posted by: donna | Feb 17, 2007 8:21:02 PM

People will buy new Windows computers the same way and for the same reason as they always have... when the old one breaks or becomes so old it doesn't make sense to keep using it because the new ones are cheap and many times faster. This whole idea that there's gonna be some huge stampede to upgrade old computers to Vista is a fabrication (and/or delusion) of people with big positions in Microsoft stock. Microsoft told us .NET was going to revolutionize the Internet... still waiting for that to happen? Or how about 'The new MSN'. And how about the Zune. That's a hot property. When are people gonna realize that Microsoft is about as exciting and innovative as the Postal Service and there's not much that can change that.

Posted by: Bob A | Feb 17, 2007 8:24:45 PM

BR... some questions, and I'd like to hear from everyone that will contribute as well, but please also no tech jargon, no ifs and buts, and no speeches. And, Al, if you're on board, you're welcome to toss a few rings too.
--
I think I remember you (BR) saying you used both a Mac and a PC, correct?

If so...

Why do you have the PC? (BTW, anyone not owning a Mac is still asked for answers to core questions)

If it's for something singular and specific that is only available with a PC, could you function without the PC?

Are you going to upgrade it to Vista or buy a new computer with Vista already installed?... or just keep it as is?.... How long, if to keep it?... or are you planning to never use Vista at all?

Are there any things that you must use a computer for that are not available to you on your Mac?

Of all computer purchases over the next 2 years, what's your opinion of the % that will be new Macs vrs the % that will be new PCs?

Do you have any friends or associates in the investment industry (others, your own industries) that don't use PCs at all?... and that means without any exceptions of use. What % of your friends and associates don't use PCs at all?

What's your opinion about whether they will or won't upgrade to Vista?... Opinion as to when?

If someone tossed your Mac and PC in a dumpster today and you could only repurchase one type, but not both, during the next 6 months... which would you buy first? If the answer is a PC, would it have Vista or XP?
---
...kill the dumpster dump theme, and resume...

If your children (or any children you know and care about their best interests) are middle-school age or in higher grades, if they did not have access to PCs for the remainder of their educational years, but did have access to Macs, would they suffer any detriment in your opinion?

Would you be willing to tell us the day you upgrade to Vista or buy a new PC with it installed?

What % of all computer users do you anticipate would have difficulty, financially, purchasing a new computer, regardless of type, Mac or PC?

Which will be higher through the remainder of 2007, new PC sales by % or the 10-yr-T highest yield?

Posted by: Eclectic | Feb 17, 2007 9:42:38 PM

I think the people most willing to pay for the advanced features of Vista bought a Mac several years ago.

Posted by: dave | Feb 18, 2007 12:26:16 AM

BTW, I have 4 PCs in my house and I am not about to pay $159.00 + tax four times.

Posted by: dave | Feb 18, 2007 12:32:43 AM

Good to see Mr Larry Nussbaum back posting nonsense. Who doesn't need a hearty laugh?

This time, he delivers the infamous "Nussbaum LMAO" to Fred Hickey because Hickey wrote that he was short nine stocks in June 2004. Apparently Mr. Larry Nussbaum thinks this is a laff riot because, as we all know, the market is ever-so-much-higher today.

Yet let's review the stocks that Hickey had identified as short candidates. Hmmm....turns out that 8 of the 9 didn't do jack squat for two years after being identified as poor performers by Hickey. A laff riot indeed:

---QCOM was at 34. A year later: 32. A year after that: 32. LMAO.

---DELL was at 36. A year later: 35. A year after that: 20. LMAO.

---STM was at 21. A year later: 16. A year after that: 15. LMAO.

---FCS was at 17. A year later: 15. A year after that: 16. LMAO.

---CDWC was at 63. A year later: 56. A year after that: 50. LMAO.

---COF was at 71. A year later: 72. A year after that: 70. LMAO.

---EBAY was at 44. A year later: 34. A year after that: 23. LMAO.

---RIMM was at 61. A year later: 68. A year after that: 61. LMAO.

The only one that Hickey got wrong was TXN. However, since Aug 2005 (over 18 months ago), TXN has gone nowhere.

Good to see that your attention to detail is as strong as ever, Mr. Larry Nussbaum. LMAO!

Posted by: angryinch | Feb 18, 2007 1:45:52 AM

“I have 4 PCs in my house and I am not about to pay $159.00 + tax four times.”

Dave,

You do not have to pay that much!

I am sure there is somebody in your household who will qualify for discount Academic Software for Students, Teachers & Staff (all you need is a copy of Student ID)
(Academic version is Full-version software, the only difference you pay less.)

For example, Windows Vista Home Premium Upgrade is $69.85 and I think you can legally install it on up to three computers within your home (check it with MS to make sure).

In addition, if you buy it online you will not pay a sales tax and you can find some sites with free shipping.

In short, if you are creative, you can have this wonderful OS legally running on three of your home computers only for $70.

Check it out: http://www.campustech.com/c/campust/store.html?id=CJpjXa2U&mv_arg=MSFT&mv_pc=19

P.S. We have too many layers and layers of taxes in this country: first, we pay income taxes then we pay real estate and sales taxes, then we pay death taxes, etc... Some liberal lunatics want us to pay even more taxes like additional “carbon” tax and “fresh air” tax. God Bless America!

Posted by: V L | Feb 18, 2007 9:06:41 AM

"Yet let's review the stocks that Hickey had identified as short candidates. Hmmm....turns out that 8 of the 9 didn't do jack squat for two years after being identified as poor performers by Hickey."

angryinch: Mr Hickey has been bearish for 4 years and dead wrong. His list of companies that he has been buying puts on is much larger than those posted. But, based just on the "8 of 9" mentioned that he bought puts on (not short) that "didn't do squat", he has lost money on them all.

Unless, of course, you are implying that his puts went up in value as the underlying stocks did not go down? Now, that's worthy of a big "LMAO!"

Posted by: Larry Nusbaum | Feb 18, 2007 12:00:00 PM