Wall Street Beat: How bad will it get for tech?

Analysts are still optimistic about software

U.S. exchanges were volatile Friday after suffering their worst drop in more than two years Thursday, taking IT companies' shares down along with stocks in just about every other sector of the economy.

The question now is whether tech companies, which for the most part posted great, in some cases record-breaking, financial results in the second quarter, can continue to rack up solid sales gains.

The tech-heavy Nasdaq closed Thursday down by 136.68 points to 2,556.39, the Dow Jones industrial average fell 512.76 to 11,383.68 and the Standard & Poor's 500 index dropped 60.27 to 1,200.07. Computer companies on the Nasdaq were down 1.97 percent for the year, while telecom companies on the exchange were down 16.08 percent.

A government employment report Friday morning gave some respite from the bad news. Better-than-expected payroll increases in nonfarm and private companies brought the unemployment rate to 9.1 percent, rather than the 9.2 percent forecast by analysts at Briefing.com. The news helped boost exchanges, and may have allayed fears of a "double-dip" recession.

In early afternoon trading, major U.S. exchanges pulled through great trading volatility to manage gains: The Nasdaq was up by 2.7 points, the Dow by 121.32 and the S&P by 9.57.

The U.S. Congressional deficit agreement reached early in the week, which included spending cuts and the closing of what officials called tax loopholes, allowed the debt ceiling to be raised and avoided a government default on obligations such as bond holder payments and government salaries. But weak economic data throughout the week pushed stocks down.

A Monday report from the Institute for Supply Management (ISM), for example, showed a slowdown in factory activity for July. On Wednesday, the ISM released its latest index for the nonmanufacturing sector, which showed a decline.

Also weighing on investors is a fierce debate about debt agreement. While conservative politicians such as Senator Marco Rubio (a Republican from Florida) argue that spending must be cut to preserve the U.S.' credit rating and prevent inflation, many economists say that spending cuts could weaken the economy.

"The problem is a lack of demand," said Andrew Bartels, an economist and analyst at Forrester Research. "Spending cuts at this moment are unproductive." Economic research, including a report from the International Monetary Fund, shows that spending cuts have led to economic growth only in limited and fairly unique circumstances, he noted.

However, the debt deal may not be too bad for the IT industry, Bartels said. "One of the more positive things about the deal as it turns out, is that there are only about $21 billion in cuts for calendar 2012, starting in October." In addition, as they seek operational efficiency, public administrations are more likely to cut staff than IT, Bartels said.

In fact, that is more or less what has happened in the enterprise: Jobs have been cut before IT budgets, Bartels said. "We're still looking at 7 percent to 8 percent growth" in U.S. IT spending this year, Bartels said.

The big concern, however, is for next year. Government data released last week show that gross domestic product (GDP) for the second quarter was a weaker-than-expected 1.3 percent. Revisions to earlier GDP data showed growth that was less than previously calculated. There is usually a lag of several quarters between weak growth and IT budget cuts, so growth in U.S. IT spending next year could slow down to 5 percent to 6 percent, Bartels said.

For now, many industry analysts are still confident in tech vendors' ability to reap strong sales, mainly in the software arena. Two weeks ago, for example, Microsoft reported an 8 percent year-over-year revenue increase, to $17.37 billion, and a whopping 30 percent jump in profit to $5.87 billion. Sales to businesses were strong. Boosted by software and services, IBM reported a 12 percent year-over-year jump in revenue to $26.7 billion and an 8 percent increase in profit to $3.7 billion.

In his weekly commentary, Canaccord Genuity software analyst Richard Davis Thursday likened the current stock market scenario to what happened last year. After declining on fears of a double-dip recession in the third quarter last year, software companies started reporting strong results in September, helping to spark a market rally.

"We still believe in the always popular Q4 software rally," Davis wrote. "Unless you want to make the called shot that the world is headed back into a severe recession, software companies, especially those with next generation cloud architectures, are in the very early stages of a decade-long upgrade cycle."

The PC arena is another story. Faced with competition from mobile devices, PCs and components have suffered this year. Worldwide PC microprocessor unit shipments in the second calendar quarter of 2011 declined 2.9 percent compared to the first quarter and were about flat compared to the same period a year earlier, IDC said this week.

Looking at chip shipments for all devices including tablets and phones, however, there is still reason to be optimistic for the rest of the year, according to the Semiconductor Industry Association (SIA). The SIA this week reported that worldwide sales of semiconductors were $24.7 billion for the month of June 2011, a 1.5 percent decrease from the prior month and a 0.5 percent decrease from a year ago. Overall, however, the SIA has maintained it earlier forecasts.

"Despite this month's modest contraction in sales, the industry saw a 3.7 percent increase in the first half of 2011 sales compared to the same period last year which saw record breaking growth," said Brian Toohey, president of the SIA, in a statement. "Overall semiconductor sales are on track with growth projections of 5.4 percent growth for 2011."

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Tags business issuesInstitute for Supply ManagementMicrosoftIBMInternational Monetary Fundfinancial resultsSemiconductor Industry AssociationCanaccord GenuityForrester Research

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Marc Ferranti

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