Wall Street Beat: Tech stocks waver despite strong sales news

Economic worries put a damper on shares, as Google sales jump and Facebook's buy of Instagram confirms forecasts for a hot tech M&A market

Concerns about the economy appeared to outweigh promising sales news from major IT players including SAP and Google, as computer stocks, along with other sectors, ended a losing week Friday.

In addition to upbeat earnings reports from Google and SAP, PC shipment news was better than expected, and Facebook's announced US$1 billion acquisition of Instagram appeared to confirm expectations of a hot mergers and acquisition market this year.

Computer stocks on the Nasdaq exchange, however, closed down by 1.83 percent in aggregate Friday afternoon. The Nasdaq itself was down by 44.22 points to 3011.33, the S&P 500 was down by 17.31 points to 1370.26 and the Dow Jones Industrial Average was down 136.99 to 12,849.59. The declines erased an uptick in markets Thursday, and closed the week at a loss for U.S. stocks.

Market watchers ascribed the sell off Friday as a reaction to reports of the rising cost of insuring Spanish debt against default, which exacerbated concerns about Europe's financial health. After a strong first quarter, markets have fluctuated in the last two weeks, buffeted by reports about the economic health of both Europe and China -- two huge markets for consumer and IT products. China's annual economic growth slowed to 8.1 percent in the first quarter of 2012 from 8.9 percent in the previous quarter, the National Bureau of Statistics said on Friday.

The earnings season for tech nevertheless got off to a good start this week, though quarterly reports were not entirely free of problem issues.

SAP's preliminary report for the first quarter on Friday was not uniformly upbeat, but the company gave assurances that the current quarter would be strong. SAP said first quarter revenue was up year-over-year by 11 percent to €3.35 billion (US$4.4 billion),while operating profit rose 6 percent to €630 million. The company's operating margin, however, slipped to 18.8 percent from 19.7 percent a year earlier.

SAP officials said they have ironed out some kinks in sales and expect revenue from software and services to jump 14 percent to 16 percent year-over-year in the second quarter.

Company officials struck an optimistic note. "The execution issues that impacted our results in the first quarter were local," and have "nothing to do with demand for business software in general," co-president Jim Hagemann Snabe said during the call.

On Thursday, Google reported that its profit for the first quarter skyrocketed by 61 percent to $2.89 billion, while revenue jumped 24 percent to $10.65 billion. The company also announced a two-for-one stock split designed to increase the volume of its shares on the market and make them more affordable to a broad array of shareholders, without affecting the voting power of its senior managers.

CEO Larry Page tried to assuage concerns about a decline in the average "cost per click" paid to Google by advertisers. The figure has been affected by the increasing use of mobile devices, where ads are cheaper. Page, however, suggested that mobile ads will end up costing more as local businesses increasingly reach out to potential buyers via mobile devices.

Meanwhile, both IDC and Gartner this week issued reports that showed PC shipments growing faster than expected in the first quarter.

Global PC shipments were 87 million, up by 2.3 percent year over year, IDC said. IDC had forecast a decline of 0.9 percent, due to a shortage of hard drive supplies in the wake of floods in Thailand. Gartner reported PC shipments grew by 1.9 percent, compared to predictions of a 1.2 percent drop.

Gartner noted that EMEA (Europe, Middle East and Africa) shipments, with a 6.7 percent jump, were especially strong, though shipments in the U.S. dropped by 3.5 percent, while Asia-Pacific performed below forecast due to slower-than-expected growth in India and China -- one of the reasons the stock market has been skittish this week.

"History has shown that periods of slower growth are followed by recovery as improving technologies make replacements as well as new purchases increasingly compelling," said Loren Loverde of IDC, in a report. "As a result, we expect PC shipments to pick up significantly by the fourth quarter and beyond as HDD supply and pricing are normalized, Windows 8 is launched, and replacements pick up."

In M&A news, Facebook Monday said it is buying Instagram, the maker of the popular mobile photo-sharing app, for $1 billion in cash and stock. The deal highlights some of the main drivers for M&A this year.

"The primary drivers for mergers and acquisition include the convergence of service and communications on mobile devices," said Rob Fisher, PricewaterhouseCoopers' U.S. technology leader for transaction services, discussing PwC's report on M&A last month.

Despite the share price declines this week, computer stocks on the Nasdaq are still up by about 21.5 percent for the year. With companies including Microsoft, Yahoo, Nokia and IBM reporting next week, market watchers will be eyeing the tech sales for signs of confidence among buyers.

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Marc Ferranti

IDG News Service

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