In the ensuing two short weeks since news broke 3 January about the flaw in chips that exposed computers and devices to securities vulnerabilities Spectre and Meltdown, a few tech companies have seen share prices buffeted and others have seemingly crested the tsunami of bad news.
The CES conference in Las Vegas is the biggest in the tech industry and its where tech companies are use to unveil the big news and launches. The conference suffered a power outage and there was heavy rain which made it all more portentous.
According to FactSet, at industry level 12 of the 18 companies that issued positive EPS guidance were in the semiconductor and software industries. The Information Technology sector is expected to report the third highest earnings growth of all eleven sectors in Q4 2017 at 15.9% led by growth in semiconductor industry.
Whether or not the chaos enveloping the industry could present opportunities or expectations for further difficulties remains to be seen but let’s first take a look at what happened, some of the key publicly held players’ responses and market reaction.
Not a paranormal pair
In the simplest of terms, this security crisis is likely to affect everyone with a modern computer and or device leaving them open to having their information stolen. Meltdown and Spectre will exploit vulnerabilities differently and here is a comprehensive but easy explanation of both by researchers.
Meltdown will affect desktop, laptop, Cloud computers and every Intel processor since 1995 (except for two of their processors Intel Itanium and Intel Atom 2013). ARM has admitted that some of its processors are affected but said at first there was “near zero risk” for some variants to affect its processors. It has since changed its tune and admits that Spectre is applicable to AMD processors. There are workarounds/fixes that are currently being rolled out.
Spectre is a root problem that is more difficult to solve and is therefore expected to hang around for much longer. Every system is expected to be affected: desktop, laptops and smartphones around 3 billion of them according to MIT Technology Review and can be found on Intel, AMD and ARM processors.
Google Project Zero announcement
Chip companies, system developers and cloud computing providers were all made aware of the security flaws privately and apparently, public disclosure was due to come a week after it was exposed after fixes were developed and deployed where possible.
However, it was anything like managed communication by the companies involved as the release of news by Google Project Zero of the flaw was suddenly brought forward. Accusations that some of tech companies were sowing confusion and obfuscation came thick and fast and share prices have responded.
Analysts say investors should expect continued volatility by the main responders: semiconductor, operating system companies and providers of cloud services. So which of the key companies had their own mini-meltdown in response, which surfed through chaos by remaining calm and transparent and what was subsequent market reaction?
Blessed are the chip makers
Intel: At close on Friday 12/1/18 down -0.39% at $43.24. It made gains over past 12 months of +17.53%
Intel bore the brunt of the bad news initially because of its market dominance with its chips powering PC and servers. While Spectre will affect chips from many vendors, Meltdown only affects those made by Intel for the past 20 years and AMD’s highest performance chips.
The company initially sought to downplay the news as its share price plunged. However, CEO Brian Krzanich has since pledged in an open letter a 15 January deadline to update 90% of Intel’s CPUs made in the last five years and the remainder to be fixed by the end of the month.
Krzanich also promised: “We commit to provide frequent progress reports of patch progress, performance data and other information.”
Intel has seen a spectacular turnaround in the past five years as it shifted beyond PC chips in to faster growing technologies, which include AI-centric intelligence and a move into autonomous driving partnerships with the likes of BMW and Delphi Automotive and its share price had been rewarded up 27% last year.
It also announced a new deal to supply chips to Waymo, the Alphabet subsidiary at the forefront of the self-driving cars. Waymo is already offering a driverless ride-hailing service in Phoenix. Analysts still expect the company to deliver over the next five years if it keeps on track.
But since the disclosure about the security issue, market response was fairly sharp with the stock falling close to 5% in the days following as Intel deflected a bit by suggesting that other vendors would be affected. Plus the optics of Krzanich’s selling shares in November while trying to address the issue doesn’t play particularly well. Its share price has since recovered as fixes are being rolled out and its current level of transparency, specifically its white paper, are applauded by tech insiders.
AMD: At close on Friday 12/1/18 down -0.99% at $12.02. It made gains over past 12 months of +14.75%
Intel’s chief competitor, Advanced Micro Devices, gained ground for a while as investors saw benefit and possibly the company grabbing data centre share as a result and its share price was boosted.
During the CES conference AMD’s chief executive Lisa Su and chief technology officer, Mark Papermaster met with MarketWatch and said that the problem only affected “legacy processors” that could be fixed quickly with Microsoft patches. Papermaster was also quoted “By the end of the week, this will be history.”
AMD’s chips are not susceptible to Meltdown with the company saying in its latest update from Papermaster that it was “not applicable to AMD processors”. However, AMD admits that Spectre does apply and it has since rolled out fixes. The admission led to a share price fall of 3.1%. Further Microsoft stopped using fixes on PCs that used AMD processors after some customers complained they couldn’t reboot their systems which added some pressure to AMD’s share price.
The company had a stellar run in 2016 when its share price jumped 300%, in 2017 the story was a little different with more volatility as it traded between $10.50 and $15.50 for pretty much of the year. Not running anywhere as strong as rivals Intel and Nvidia. The latter was trading up 15.2 times sales in November 2017 and Intel 3.4 times sales while AMD was down at just 2.4 times said InvestorPlace.
Simply Wall St estimates revenues to grow by 45.99% over the next few years “indicating a highly optimistic future ahead. If expense does not increase by the same rate, or higher, this top line growth should lead to stronger cash flows, feeding into a higher share value.” Advanced Micro Devices has a consensus rating of Hold and target price of $14.73.
Merger with no answers
Qualcomm: At close on Friday 12/1/18 down -0.08% at $65.38. It made losses over past 12 months of -2.24%
This wireless chip provider for smartphones has been in the news with on the receiving end of an unsolicited $130bn bid from Broadcom and less so for any looming effects from Spectre or Meltdown because of the singularity of the mobile ecosystem. TechCrunch said according to president Cristiano Amon, “the impact on the mobile industry will probably not be very high because the fixes are already available and won’t have any major impact on performance.
Qualcomm announced at CES that it has won business to supply Samsung and others with RF-chips for premium smartphone models as well as other products and partnerships around the automobile industry, voice assistants and 5G.
It shares also rose following a report by the Wall St Journal that it was to get conditional European Union antitrust approval for its $39bn acquisition of NXP Semiconductors as soon as this week. This acquisition is seen as having the potential to make Qualcomm more competitive and to expand its lines of tech to self-driving cars.
However, Qualcomm is fending off Broadcom’s hostile bid and dealing with a legal suit brought against it by Apple in the US related to royalties on Qualcomm chipsets.
Its unclear whether the NXP deal will be enough to bring this stock in from no man’s land where it has strayed over the past couple of years as its older technology has meant revenue is stagnant and growth prospects are uncertain. How the mergers play out are more likely to determine Qualcomm’s success.