Wall Street Beat: IT rebounds as Nvidia, Cisco shares rise

Economic concerns shift to Italy, as Thai floods threaten the hard-drive supply chain

With Nvidia and Cisco reporting results, there was some good news on the chip and networking front this week that, with the help of a successful debt offering by Italy that eased economic concerns, helped fuel a rise in IT vendors' shares Friday morning.

Economic worries and potential supply-chain disruption from floods in Thailand have been weighing on the IT sector, however.

After the market closed Thursday, Nvidia reported that for the quarter ending Oct. 30, net income was US$178.3 million, more than twice as much as a year earlier. Excluding one-time items, net income per share of $0.35 was $0.08 higher then expectations of analysts polled by Thomson Reuters. Sales increased a healthy 26 percent to $1.07 billion, a hair under analyst estimates for $1.06 billion.

Company watchers were generally pleased with the results.

"Nvidia is the brains behind many smart phones," noted analyst Jeff Kagan in email. "Nvidia looks like they are in the right place with their growing mobile computing business. It is the engine behind a young and growing revolution in the industry with smart phones, tablets and automotive information and entertainment systems."

Nevertheless, the solid profit report did not move analysts, most of whom have "hold" or "neutral" guidance for Nvidia shares, to change the overall stance on the company.

Canaccord Genuity analyst David Rovelli maintained his hold rating on the chip maker, as a result of potential weak PC demand and hard drive shortages going forward. "Shortages are poised to worsen beyond December and could negatively impact desktop production, an area of expected near term growth for the company," Rovelli wrote in a research note.

Hardware shortages are largely expected due to floods in Thailand. The floods will have an impact on PCs through the first half of 2012,IDC said Thursday. With operations disrupted at more than a dozen hard disk drive (HDD) factories, damage to the industry is significant, IDC said.

In the first half of 2011, Thailand accounted for as much as 45 percent of worldwide HDD production. As of early November, nearly half of this capacity was directly impacted by the flooding, which could lead to worldwide shipments dropping by as much as 20 percent in the first quarter compared to previous projections, IDC said.

Hard-drive costs are also likely to rise, which will lead to an increase in PC prices as well, IDC said.

Nevertheless, Nvidia shares rose along with the markets Friday, jumping $0.15 to $14.60 in late-morning trading.

Meanwhile, soft corporate spending affected Cisco profit, which nevertheless managed to beat analysts forecasts as the company's new focus on streamlining operations appears to be paying off. Last quarter, Cisco said it would cut 16 percent of its workforce and reduce costs by $1 billion.

Cisco, considered an IT bellwether because its networking products are central to corporate IS operations, posted earnings of $2.3 billion, or $0.43 per share, for the three months ended Oct. 29. This was a decline from its year-earlier profit of $2.4 billion, or $0.42 per share. But revenue rose 4.7 percent year-over-year to $11.3 billion.

The results beat the forecasts of analysts surveyed by Thomson Reuters, who were looking for earnings of $0.39 a share and on sales revenue of $11.03 billion

Cisco offered guidance for the current quarter that, on the upper end, is greater than what market watchers have been expecting. The company forecast profit of $0.42 to $0.44 per share on revenue of $11.13 billion to $11.23 billion. Analysts on average expected $0.42 per share on revenue of $11.14 billion.

Despite economic concerns, the U.S. online retail market so far is looking as good as ever, according to a comScore report this week. U.S. retailers' online sales increased 13 percent year-over-year to $36.3 billion in the third quarter, the eighth consecutive quarter of growth, comScore said. The main driver behind the numbers was a 22 percent growth in the number of people buying merchandise online, the company said.

"We are optimistic about the continued health of the e-commerce sector despite other factors -- including stubbornly high unemployment and volatile financial markets -- currently weighing on the economy. More consumers than ever before are relying on the online channel for product and pricing information," said comScore Chairman Gian Fulgoni.

As has been the case for the last several quarters, economic concerns, especially worries about European debt, appeared to have had as much of an effect on IT share prices this week as did financial results or supply-chain reports.

The focus on Europe's economic woes has shifted from Greece to Italy, where Prime Minister Silvio Berlusconi announced he would step down after a fiscal austerity plan makes its way through Parliament. A default on sovereign debt by Italy, the world's eighth-largest economy, would have a far greater impact outside of Europe than a Greek default.

Italy's political chaos caused markets to decline in the middle of the week. On Thursday, however, a successful Italian offering of debt securities put markets back on the upswing. Italy raised €5 billion ($6.8 billion) in an auction of one-year securities.

All major indexes in the U.S. rose Thursday. Friday morning, the Dow jumped 271.21 point to hit 12,165, the S&P rose 25.21 to reach 1264.90, and the Nasdaq rose 48.62 to hit 2673.68. Computer stocks on the Nasdaq rose 22.83 point in aggregate, with Cisco shares rising 0.41 to $19.04.

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Marc Ferranti

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