Skip to main content

Tech stock outlook increasingly fragmented

As the title of this post says, the tech stock outlook is becoming increasingly fragmented. For much of 2007, a simple investment in a couple of broad-based ETFs such as the QQQQ or XLK would have brought an investor double-digit gains. Now, as we get later in the cycle and the economic backdrop becomes somewhat questionable, doubts emerge in some tech sub-sectors.

The following illustrates the "hot and cold" nature of the current tech environment.

IT spending slowing

From IDC, we have the following prediction: "Worldwide IT spending will grow at a slower pace in 2008. Economic uncertainties and downside risk will dampen IT spending growth in the U.S. and elsewhere. As a result, worldwide IT market growth will be a moderate 5.5-6.0%, down from 6.9% in 2007."

From InformationWeek, we have the following quote: "In the most recent survey by the Society for Information Management, less than half of 130 CIOs and IT managers who responded (49%) predict their IT budgets will be larger next year than this year. Almost a third (30%) say their budgets will stay the same, and 21% say they'll have less IT dollars next year. In comparison, 61% say their 2007 IT budgets were greater than their 2006 budgets, 17% say they were the same, and 22% say they got less this year than last." InformationWeek conducted their own survey with similar results.

Slowing IT spending always impacts the business software vendors. As written in Barron's, we may have one exception this time: Oracle. According to Cowen, Oracle looks to continue its strong growth trend into 2008 but analyst Peter Goldmacher advises investors they shouldn't take Oracle as a proxy for the whole software industry.

Also victims of slowing IT spending are the hardware manufacturers. Where IBM may be well diversified, a company like Sun, still working in turn-around mode, could be in for trouble.

Telecom spending a bright spot?

Cisco, in their latest earnings announcement, almost single handed initiated the most recent downturn in tech stocks by indicating "lumpy" sales into automotive and financial IT shops. A very recent report that AT&T will be buying Cisco core routers is a new positive for Cisco and could be an indication that demand remains strong from telecom companies. AT&T explained their expansion plans by noting that Internet traffic had doubled in the last couple of years.

Consumer electronics are hot!

Consumer electronics are selling well. Apple has made gadgets sexy again and this benefits most other gadget makers and the specific semiconductor companies supporting them. Sony and Apple, for example, are both seeing strong sales thus far during the holiday shopping season, especially on "Black Friday". Apple shares are hitting highs and the company is sitting on $15B in cash.

Semiconductors

A recent theme in the semiconductor industry has been growing overcapacity. Overcapacity has two effects. First, it holds down prices of certain types of semiconductors thus squeezing margins of chip manufacturers. Memory chips are a prime example: DRAM and NAND stocks all encountered big sell-offs this year as unit prices fell due to oversupply. Second, until the overcapacity is absorbed, it will tend to weaken demand and impact sales in semiconductor equipment, thus negatively affecting another tech sub-sector. Indeed, Gartner sees a 4.4% decline in capex in 2008, instead of a previously predicted 4.8% increase, and a flat equipment market (0.3%) vs. anticipated 6.2% growth.

Conclusion

There is still strength in tech but it is not across the board. Some sectors will do well (consumer electronics, telecom suppliers), some not so well (semiconductor equipment). Within sub-sectors, there are individual stocks that may continue to do well (Oracle) while the rest of the sub-sector struggles. International results may provide a boost for some companies but not for others. 2008 will require a much more careful approach to tech stocks to achieve superior results.

Sources: IDC, InformationWeek, Barron's, BusinessWeek, SolidStateTechnology

Comments

Popular posts from this blog

Unlock Stock Market Profits - Key #1

This is the first in an ongoing series of articles where I discuss what I feel are keys to successful investing. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. (Click here to read the original post)

There are two basic steps to investing. First, you need to find stocks that seem to have some potential. Then you have to determine whether these stocks are actually good investments. There are many stocks that at first glance look interesting, but further research reveals that there are too many negatives to warrant taking a position.

This first post in the series starts at the beginning: getting good investment ideas.

Key #1: If something special is happening to a stock, it will be reflected in some kind of unusual activity in the markets.

As individual investors, we will never be the first to know; however, unusual activity can be an early sign that allows us to follow the Wall Street professionals and …

Unlock Stock Market Profits - Key #4

This is the fourth article in a series of posts describing 10 tools to help you identify and evaluate good investing ideas. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. (Click here to read the original post)

With this fourth post, we will continue another step along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. The third post described how to use lists of new highs and new lows. This post will focus on identifying social or business trends in order to find investing ideas.

Information on new trends might turn up anywhere. In conversation with friends or business associates, in newspapers or magazines, on TV or though your work. The key is to be aware of trends and how they start, stop or change. We'll start by describing what to lo…

Durable Goods report for Sept just so-so but Computer segment is on fire

The Durable Goods advanced report for September 2011 was released on Wednesday.

I like to dig into the Durable Goods report because it can be useful for seeing how tech in aggregate is performing and how the sector may perform in the future. I always focus on two particular measures: shipments and new orders. Let's see how it played out last month.

Shipments -- 

I generally give less importance to Shipments since this is a backward looking measure reflecting orders that have been confirmed, manufactured and shipped. It's similar to earnings reports -- it's good to know but the data is in the past and we're more interested in the future. The following chart shows how September shipments looked for the overall tech sector:


Results for the overall tech sector were a bit weak but take a look at the next chart which tracks the Computers and related products segment:


Results here were actually quite good and, to make things even better, the previous month was revised upward.

N…