Wall Street Beat: Tech stocks up despite dire PC, server outlook

Optimism about cloud technology and mobile devices fuels the enthusiasm

Despite dismal forecasts for PCs and servers, tech stocks have been doing well on optimism about cloud technology and mobile devices.

A fresh batch of dire forecasts for the hardware market came out this week, yet tech stocks have continued to lead markets to new heights this month.

The Nasdaq Computer Index, which tracks 394 tech-related companies, was on track Friday to close out May with an approximately 4 percent gain for the month, about 9 percent up for the year. In midday trading, the computer index was at 1689.86, up 5.82 points for the day.

Though tech got off to a slow start this year, it has outpaced other sectors recently as the Dow Jones Industrial Average and the Standard and Poor's 500 indexes hit milestone highs. In midday trading Friday, four of the five tech companies in the Dow were trading up. Microsoft, IBM, Cisco and Intel were up, while only Hewlett-Packard was trading down from its opening.

Though Intel, like HP, is affected by the fortunes of the PC market, company watchers have gotten excited about its upcoming Haswell chips, designed with laptops and tablets in mind. Intel will be talking more about Haswell next week at the Computex trade show in Taipei.

The rise in investor optimism in tech has come in the face of a darkening picture for PCs. Just this week, IDC forecast worldwide PC shipments to decline by 7.8 percent this year. In its prior report, IDC forecast a 1.3 percent decline, followed by a gradual increase in volume.

The new report, however, also calls for a decline of 1.2 percent in shipments next year. What's worse, IDC said shipment volume will hit only 333 million in 2017 -- below the 349 million shipped in 2012 and a peak of more than 363 million shipped in 2011.

In the near term, the wait for Windows 8.1, which is expected later this year, will likely depress PC sales for the third quarter, according to Sterne Agee analyst Vijay Rakesh.

"We believe similar to the Win8 launch last year in October, which held back PC OEMs and ODMs from aggressively pushing PCs at back-to-school, a Win8.1 refresh could be holding the supply chain back," wrote Rakesh in a research note this week, discussing major PC makers and for-hire contract manufacturers.

Meanwhile, the market for bigger machines has not been doing well either. In the first quarter, worldwide server shipments declined 0.7 percent year on year, while revenue declined 5.0 percent from the first quarter of 2012, according to Gartner.

"The first quarter of 2013 was certainly not a strong period for the server market on a global level," said Jeffrey Hewitt, research vice president at Gartner, in a report this week. "The only regions to post increases were Asia/Pacific and the United States."

"Budgets are restricted and server infrastructure spending is clearly not the highest priority for many organizations," added Adrian O'Connell, research director at Gartner.

Despite the gloom hanging over segments of the hardware market, there is an underlying optimism that appears to be driving tech. While PC and server sales decline, smartphone and tablet sales are rising.

Tablet shipments are in line to increase 58.7 percent year over year in 2013, reaching 229.3 million units, IDC said in a report this week. The market research company said tablet shipments will surpass those of portable PCs this year. What's more, IDC expects tablet shipments to outpace the entire PC market, including portables and desktops, by 2015.

"What started as a sign of tough economic times has quickly shifted to a change in the global computing paradigm with mobile being the primary benefactor," said Ryan Reith, program manager for IDC's Mobility Trackers. "Tablets surpassing portables in 2013, and total PCs in 2015, marks a significant change in consumer attitudes about compute devices and the applications and ecosystems that power them. "

Outside the hardware market, industry insiders are optimistic about cloud-related technology. This year, U.S. tech executives continue to show moderate optimism about revenue growth, according to the annual Technology Business Outlook report from tax and financial advisory firm KPMG.

Just under 80 percent of the executives questioned by KPMG expect their company's revenue to increase over the next year, compared with 77 percent in last year's results, according to the survey, which polled U.S.-based technology company executives. "More than half say SaaS is the main driver of cloud revenue, while almost a third cites mobile applications and mobile platform as the two main mobile revenue drivers," noted Gary Matuszak, head of KPMG' s Technology, Media and Telecommunications practice.

"Cloud and mobile are continuing to drive innovation and competitive leadership in the tech sector," he added. "Revenues are materializing as cloud and mobile continue to become key technology platforms for a number of industries and adoption is growing in countries and businesses where there is less legacy IT infrastructure."

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Marc Ferranti

IDG News Service
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