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Old tech's mediocre earnings undermine investors' shift to safety

Aaron Pressman
The Exchange
Old tech's mediocre earnings undermine investors' shift to safety

As high-flying social networking stocks cratered over the past few weeks, it was the out-of-favor old guard of tech – the IBM’s (IBM), the Intel’s (INTC), the Google’s (GOOG) – that held up better.

The theory was that the big companies would weather any difficult times, perhaps brought on by the Fed, better than smaller upstarts. But as the giants have reported first quarter earnings, it’s become apparent these lumbering behemoths were out of favor for a reason. There’s not much growth, and profits, while still sizable, may be under threat.

On Wednesday IBM reported first quarter revenue of $22.5 billion, well below the $22.9 billion Wall Street expected, as hardware sales took a hit. Sales at the overall systems and technology unit declined 23%, including a 40% drop in sales of “Z” mainframes and a 22% drop in the “Power” server line. IBM said its sales related to cloud computing jumped 50% but the company didn’t actually disclose the dollar figure of those sales in its earnings reports.

At Google, growth was stronger but slowing. Revenue grew 19% to $15.4 billion, just below analysts’ expectations, and adjusted profit of $6.27 per share missed the average analyst target of $6.41. The number of paid clicks rose 26%, a slowing from the prior quarter’s 31% growth rate.

Slipping shares

Shares of Google dropped 6% in after hours trading, while IBM slid 2%.

The results followed Intel’s mediocre quarter, with revenue of $12.8 billion and earnings of 38 cents a share just about matching Wall Street’s expectations when it reported Tuesday. But Intel also gave a clearer view into its troubled mobile chip business, where sales plummeted 61% to only $156 million, leading to an operating loss of $929 million. On the earnings call, analysts asked question after question about the loss.

Intel shares bounced around during the regular and after-hours sessions, standing 7 cents above Tuesday’s close.

Hardware weakness has been a concern for Intel and IBM for ages. Starting last summer, stock shorters piled into IBM as revenue from its highest margin businesses slipped. And Intel's plan to replace lost sales of expensive PC chips with super-chip mobile chips never seemed to add up.

Meanwhile, there’s still not much confidence surrounding the former high flyers led by Facebook (FB) and Twitter (TWTR). Facebook shares are still off 17% from their March 10 closing high of $72.03. Shares of Twitter have lost one-third of their value since mid-February.

More-speculative plays such as cloud HR provider Workday (WDAY), network security expert FireEye (FEYE) and tiny healthcare cloud service Castlight Health (CSLT) have bounced back somewhat in recent days but also  remain well below their highs.