Friday, February 20, 2015

High Tech "State of the Union", Q4 2014 - Part 4: Forecast




























Source: hoocher.com

There is a history in all men's lives,
Figuring the nature of the times deceas'd,
The which observed, a man may prophesy
With a near aim, of the main chance of things
As yet not come to life, which in their seeds
And weak beginnings lie intreasured. - Shakespeare, "Henry the Fourth, Part II"


As we wind our way on the valley trail leading us to the foot of Mount Parnassus, offerings in hand for the Oracle at Delphi, it would behoove us to review the stages of our journey that have led us hither. Nearly a full year has passed since this blog began last March 30th and many are the tales we've heard as the winds and waves have carried us to this shore to follow in the footsteps of Athenians, Spartans, Lydians, Macedonians and even Romans to once more undertake a pilgrimage from ancient times.

With 2014 behind us and a full seven years of data at our disposal, we are in a position to make some prognostications as to what awaits us in 2015 and perhaps a little beyond. What is it that each of our industry sectors are telling us to expect?

And I had done an hellish thing,
And it would work 'em woe:
For all averred, I had killed the bird
That made the breeze to blow.
Ah wretch! said they, the bird to slay,
That made the breeze to blow! - Samuel Taylor Coleridge, "The Rime of the Ancient Mariner"


The Big Iron - Simply put, the systems-level enterprise networking and datacenter segment tells a tale of woe. Cisco is in the doldrums. HP never fully recovered from the 2008 financial crisis and has been steadily declining since Q1 2011. The upcoming split into enterprise and consumer computing firms by the end of the year might be the only thing that stands a chance of reversing the company's decline. 

IBM, however, is a complete basket case. These past seven years have seen executive management conducting what almost looks like a stealthy leveraged buyout of the company, as IBM has spent $80B on stock buybacks.
http://www.fool.com/investing/general/2014/12/05/share-buybacks-are-killing-ibm.aspx

In these past 7 years, IBM's executive staff bet on Cloud and general enterprise IT services for growth, believing these to be low overhead, high margin businesses. The writing was already on the wall that this premise was false, but company leadership charged ahead regardless. 

As fat margins never materialized and instead shrank over the years, the executive team vividly demonstrated its gross incompetence by further neglecting Big Blue's industry-leading system and silicon hardware in favor of artificially boosting share prices thru leveraging the company and buying its own stock. 

Though this helped IBM improve its tax profile (since capital gains are taxed at a lower level than income), increased EPS and fattened executive stock compensation schemes, it did nothing to maintain the company's position of competitive leadership. To put it a little less delicately - even with favorable winds and calm seas, Big Blue would nonetheless be dead in the water with the current collection of buffoons running the ship. Their astonishing incompetence has turned this once mighty vessel into a floating wreck, adrift and in mortal peril.


























Source: wikipedia

More generally, the Big Iron tells a story of stagnation and decline. No matter how well any individual High Tech firm may perform in 2015, weakness at the system level is bound to dampen the outlook for the industry as a whole. That weakness is likely to deepen as well, thanks to the latest revelations regarding NSA tampering with HDD firmware worldwide:
http://news.yahoo.com/russian-researchers-expose-breakthrough-u-spying-program-194217480--sector.html

This news will reverberate across High Tech, causing damage in the worldwide storage market with cascading negative impact to datacenter and networking segments in general.


A life on the ocean wave!
A home on the rolling deep;
Where the scattered waters rave,
And the winds their revels keep! - Epes Sargent

Wintel - In stark contrast to the systems houses of the Big Iron, these two old PC market ships of the line are building momentum. Microsoft in particular is growing strongly against howling headwinds in Cloud services and mobile computing, while Intel seems to have found a way to break out in 2014 from its previous two year slumber.

There's really no secret to what led to the market-beating success of Wintel. Both simply decided that their individual survival depended on the ability to learn from mistakes and persist in efforts to expand away from their foundational businesses. By showing flexibility, a willingness to learn and the courage of perseverance, both companies have found ways to add compelling value to their new offerings in highly competitive markets. As a result, they appear to be on their way to reestablishing their previous roles as industry leaders.




Source: imgarcade.com

Area 51 - Apple and Google continue to perform well - Apple extraordinarily so as it took share from Android smartphone vendors in the 2nd half of the year. Yet both face cloudy horizons with the dawn of the new year.

Apple's iPhone6 success implies that the company has an intuitive understanding of the growing convergence between smartphones and tablets - hence the firm's confidence in releasing smartphones with very large screens, despite industry pundit auguries which condemned the idea. If the iPhone 7 can further that convergence, it will break sales records as well - but that's a mighty big If. 

The fact that smartphones may be peaking this year and tablets are expected to flatline or possibly decline (see the March 30 and May 15 posts) will make it all the harder for Apple to repeat its 2014 performance. Consequently, I am tempering my growth expectations of Apple for 2015 to a range of 0%-5%.

Google is in significantly more long term trouble, however. As predicted in the August 15 and November 7 posts, Google's executive management is now taking heavy fire from stockholders stemming from a chronic lack of tangible results from all of its Applied R&D programs. To add insult to injury, the market withdrawal of Google Glass for extensive redesign was concurrent to Microsoft announcing the Hololens. Toshiba also joined the fray alongside Sony and Epson with their own Smart Glass offering, making it look by all appearances that Google may already be far behind in a market which it pioneered.

And since bad news always comes in threes, Google is experiencing deterioration in its ad rates, by all indications due to competition for search engine traffic by Yahoo and....Microsoft. If this continues along with Google's lack of execution in capitalizing on its R&D, 2015 could be a rough year for the company - and might even result in a management change.

The Vanara - There really isn't much to add beyond the 2/6/15 analysis. Of the three members of this group, Lattice appears the best strategically positioned for growth in the IoT with its acquisition of Silicon Image and its iCE FPGA line. As a group, however, the Vanara revenue history suggests that system business will be flat to down for the year, echoing the revenue trends of the Big Iron.

The Carolingians - the front line explorers and adventurers of European High Tech offer a very muddled picture. NXP's aggressiveness, strategic vision and execution are all paying off. Infineon continues to benefit from the relative strength of the German economy, but is now trailing NXP. STMicro continues its long term decline from the landlubber level of inept seamanship of its executive team. All together, the growth prospects of the group are likely to be minimal, as STMicro's deteriorating revenues somewhat offset further gains by NXP and Infineon.




Source: bbc.co.uk

There is some hope from the fact that all three companies are well positioned for a breakout of the IoT market. However, it is clearly NXP which is most likely to capitalize on the event.

The Stone Masons - Qualcomm was once again the standout, overcoming strong opposing currents in the smartphone market and growing its baseband line. Nvidia also grew but remained a one hit wonder as a graphics chip provider to the PC market. On a more worrisome note, Mediatek's growth stalled and reversed while Broadcom meandered. As a group, then, the Stone Masons are as muddled as the Carolingians.

What It All Means

What are the wild waves saying,
Sister, the whole day long,
That ever amid our playing
I hear but their low, lone song? - Joseph Carpenter


The performance of these firms reflects what we can now see was a recurring theme in 2014. Those companies with smart executive teams that were not afraid of learning from mistakes and had a strong strategic vision from which they could not easily be deflected were able to add value despite market conditions and grow both revenue and market share. Those lacking any of the above either stalled out or shrank. 

Obviously the High Tech market is nothing like that of the pre-dotcom bust days, when growing in High Tech was the equivalent of a farmer scattering seeds willy-nilly over a plot of ground and doing nothing else but returning nine months later to gather a record harvest. Even the pre-2008 market, which paled in comparison to the previous decade, was easier than this. The High Tech industry is now an embattled landscape dominated by an unforgiving Darwinian struggle.

Another evident difference from the pre-DotCom bust days is that High Tech is no longer a purely industrial market. Back then, the industry swung rather cleanly thru the classic 6 year boom-bust cycle of B2B markets, with the severity of the cycle the only truly differentiating factor. The last seven years, in fact, have been distinctly odd, as the following graph for the semiconductor market attests (source: WSTS, with Y axis in $B:)






Total growth over these last seven years - including the downturn - has been 4.9%/year. The y/y growth rate in 2013 was 4.8%, while 2014 was a very healthy 9.9%. 

Looking at the numbers in detail (again, from WSTS, with the Y axis in $B:)


























One factor which I usually discount in these numbers are the financials for memory, which are heavily governed by fab capacity and thus tend to swing quite dramatically in price. For the past two years, the memory sector has protested that capacity shortages have forced pricing upwards (Side Note: if this 'shortage' persists in 2015, I think we will have reason to suspect that something is seriously amiss; the memory segment has come under investigation for price collusion in the past more than once.) 40% of the revenue gains in 2014, in fact, came from memory. Yet even after removing memory from the 2014 data, the total market growth rate was still 7.5%. That's nothing to sneeze at.

What is striking by contrast is what the WSTS is projecting for 2015 and 2016. Per the latest numbers I've been able to find, they are expecting only 3.5% growth this year and somewhere around 3.1% in 2016. What could be behind such a steep drop in their growth projections?

"Would'st thou,"—so the helmsman answered,
"Learn the secret of the sea?
Only those who brave its dangers
Comprehend its mystery!" Henry Wadsworth Longfellow


Mobile Computing has been the driving force behind High Tech for the last seven years. Over the last year, I've spoken a great deal about both of those markets peaking; below is the data affirming these projections (Source: Gartner, in millions of units shipped.)





















For those of you more oriented towards hard numbers (in millions of units):















There are some illuminating revelations brought to light by this data:
1. The overall mobile phone market has been more or less flat since 2011, with smartphone growth occurring almost exclusively at the expense of feature phones.
2. Smartphone growth has been arcing over on a percentage basis since 2011.

O pilot! 'tis a fearful night,
There's danger on the deep. - Thomas Haynes Bayly

We can now see clearly why Apple's 2014 iPhone growth was not organic, but at the expense of Samsung and the rest of the Android smartphone segment. With this in mind, I reaffirm my previous forecast regarding smartphones: 2015 will be the year that this sector hits its plateau. I think we should be pleased if the smartphone market grows up to 20% this year - betting on greater growth than that would be risky. The whole segment, in fact, is set to experience increasing pain, as the last two years of price cuts in handsets and service plans is more than likely to continue and with escalating vigor.

And now, tablets (again Gartner, in millions of units):





















I had thought tablets had a little more life left in them than smartphones, but evidently the reverse is true. Most market predictions are for the tablet market to be flat or down 3-5% for 2015, and for once I find myself agreeing with the mainstream press.

The significance of this to the rest of High Tech will be universal and can be readily deduced. There will be less demand in 2015 for the chips and software for mobile computing, as well as the services that these devices require. Ergo, the chip houses and their ecosystems will experience reduced demand, as well as the entire system infrastructure from base station to backhaul all the way to WAN, Metro, LAN and datacenters, including storage.

Some good bellweathers to choose in order to gauge the depth of this blowback will be Samsung and Apple. Together, they constituted 17% of all semiconductor purchases in 2014:
http://global.ofweek.com/news/Samsung-Apple-dominated-chip-buying-in-2014-24353

These two companies together also constitute about 40-45% of both tablet and smartphone sales (depending on which market research service is reporting results.)

Could either samsung, apple or some dark horse release a product line in 2015 that further drives tablet and smartphone convergence and achieves explosive sales like the iPhone 6 did last year? That's always a possibility. However, it's a near certainty that such growth will again constitute market share conquest in what is now mostly a zero sum game in the mobile computing market.

It is a pleasure for to sit at ease
Upon the land, and safely for to see
How other folks are tossed on the seas
That with the blustering winds turmoiled be. - Lucretius


Before anyone comes to the desperate conclusion that High Tech is about to imitate the Titanic, decides to grab a brightly colored life vest and leaps overboard, it would help to remember that the industry as a whole vastly outperformed the general global economy last year. A comparison between the 2014 High Tech growth rate against GDPs of various national economies is in order. 

As a caveat: GDP is, by definition, a deceptive measure, as it ignores the implications of current account deficits or surpluses and includes a variety of qualitative alterations such as government economist "seasonal adjustments" along with interpretations of the "value contribution" of innovations in various market segments. US and Chinese GDP reports are particularly notorious for these sorts of abuses. Nevertheless, with the above understanding in mind, they can still serve as a relative point of comparison.

The collective GDP of the 28 states of the EU (including both official members and affiliates with special trade relationships) grew at a paltry 1.4% in 2014. The USA GDP showed 2.4% growth for the year, while China and India came in at 7.4% and 7.5%, respectively. On a global basis, the IMF reported GDP growth of 3.3%.

What the outlook for the global economy is for 2015 can be promptly inferred by ignoring propagandistic GDP projections and instead focusing on data that is untouched by the hands of biased economic ministries. One of these is the Baltic Dry Index, or BDI. This is a measure of shipping rates at the leading ports worldwide. Let's take a look at today's chart, tracking the last three years (source: StockCharts.com):



The series first began in 1986, peaking at 11,793 on May 20, 2008. In 2013, shipping firms began to obsolete a large number of older assets because of the extended period of heavily depressed volumes and rates since the peak. Despite that, the BDI reached a historic low of 509 just yesterday.

For purposes of clarity, let's ignore the RSI on top and the MACD hysteresis on the bottom and focus on the middle traces, in particular the pure daily BDI line. There's some important things to learn from this chart. Over a longer time frame, it would be evident that yearly BDI charts typically show sinusoidal spikes between April and July followed by a larger peak between early September and beginning December. These coincide with the shipping of raw material commodities early in the year in order to manufacture goods for the western Holiday season, product for which ships at the end of Q3 thru Q4. 

If you recall, there was widespread consensus on the part of bloviating pundits, Wall Street & central bank racketeers and CNBC/Fox Business bobbleheads in early 2012 that were heralding a breakout from the economic downturn which began in 2008 and 'officially' ended in 2011. On this chart, one can see the self-deceptive exuberance in 2012 leading to relatively strong materials shipping followed by a lousy holiday buying season. 2013 saw less shipping of materials due to leftover stock in magazines followed by a decent holiday season, though it was bemoaned at the time and was followed by a wave of retail store closures nationwide in Q1 2014. Materials stocking aligned more rationally with very cautious expectations in early 2014. Nonetheless, last Christmas was considered a bust by most retailers and further box store reductions and mergers are widely expected.

Another excellent tool free from government economist 'elaboration' is the CRB (Commodity Research Bureau) index, which tracks commodity prices worldwide for 23 different materials, including agriculture, textiles and heavily used industrial metals such as copper and zinc. Below are two charts presented for study - a three year version (again from StockCharts.com) which covers a slightly smaller and mildly different set of commodities and another chart with the full, original set of CRB components which goes all the way back to 1947 (source: crbtrader.com.)































Note that the charts show different index values in early 2015. As stated above, they use a slightly different set of commodities; furthermore, the bottom chart only extends into January. Nevertheless, the overall trend is unmistakable. Commodity prices are strongly deflating.

The bottom chart offers some extra information of note. First: notice how steady and benign commodity prices were until 1971, after which volatility became the norm. This is a subject for a full editorial all in itself. It also suggests that the downward trend in commodity pricing is not a short term thing, but is likely to have 'legs.' Thus, we can expect this trend to continue in all probability for the next 2 years.

The top chart contains an extra tidbit of data that is of significance. Notice how the 50 DMA crossed under the 200 DMA back in September and expanded the gap afterwards with a much steeper slope. This is often referred to as a 'death cross.' 

Some are undoubtedly thinking that the IoT will save the day at least for High Tech. I am also looking forward to the myriad possibilities offered by this incipient market segment. Yet notwithstanding its obvious potential, the prediction that we will shortly have a 50B unit market based on pastel-colored knickknacks from FitBit and Pebble, targeted at an admittedly well-heeled but nevertheless limited market segment that was previously the retail clientele of The Sharper Image is just too stupid to take seriously.

As a counterpoint, Apple is set to release its smartwatch offering this April. There are, to the best of my knowledge, three distinct product lines - a low, middle and high end. The high range line features watches encased in 18 karat gold. Frankly, I doubt this will reach any significant volume, as anyone who wears such a doodad in public will be laughed at in the streets. However, if Apple can add real value thru a combination of distinct styling with desirable features, maybe they'll shake up the market. Such a shakeup, though, is much more likely to eliminate many of the market's trailing participants and rewrite the rules of the game than drive immediately explosive growth in the sector.

We shall not cease from exploration
And the end of all our exploring
Will be to arrive where we started
And know the place for the first time. - T.S. Eliot

As a final word:
Gartner is forecasting 5.4% growth for 2015, while the WSTS is calling for 3.5%. I believe the Pythia would tell us that we should feel quite happy to reach 3%, as the macroeconomic indicators for the short and medium term stink. We are indeed entering a winter gale for the global economy, and High Tech will be buffeted by those same winds and waves as we sail the seven seas.

Yet we should take heart. Odysseus was driven for a full decade across the Mediterranean, with Poseidon hounding him all the way, throwing storms at the Greek hero and driving him towards a seemingly endless series of monsters such as the Sirens, Scylla, Charybdis and the Sea God's son Polyphemus the man-eating Cyclops. Yet return home he did, retaking his throne in the kingdom of Ithaca and reuniting with his wife and son.

Our future lies in the amazing technologies being crafted by dreamers with visions of a brighter tomorrow. We will return to these new inventions and capabilities in the editorials of the coming weeks as we once again voyage to the frontiers of High Tech.














































Source: thelorereport.blogdo.net


3 comments:

  1. Great analysis, Pete, on semiconductor market dynamics, the recent performance of large players, and the mobile and IoT market drivers!

    Have you thought about the influence of crude oil price drops on the BD and CRB indices over the past few months? This could explain, at least in part, the cause and magnitude of recent trends.

    ReplyDelete
    Replies
    1. Glad you liked the post, Jeff, and awesome question.
      Some background: The BDI is for bulk dry goods only - not petroleum or NG. Also, the classic CRB does not include petroleum or LG, though the Reuter-Jeffries modified CRB does. See the following:
      http://en.wikipedia.org/wiki/Baltic_Dry_Index
      http://www.crbtrader.com/crbindex/spot_calc.asphttp://en.wikipedia.org/wiki/Thomson_Reuters/Jefferies_CRB_Index
      Thus, we can conclude that the BDI is in record bad shape solely on its own 'merits.' The Classic and R/J CRB indexes differ in whether or not they account for petroleum & LG, but the trendline for both is the same. Think of it this way, too: energy prices are down for a reason. The most likely reason (per Occam's Razor) is that demand has weakened considerably.

      Delete
  2. Great post Pete. Enjoyed the thorough analysis.

    ReplyDelete

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