Wall Street Beat: Tech Gains Despite Near-term Outlook

Though the IT sales outlook for the next few quarters remains poor, news from Juniper, Qwest, Nokia, Nortel and Cisco this week highlights market consolidation trends that may allow some companies to come out of the recession stronger than ever and shows a growing tendency on the part of investors to look past immediate bad news.

The tech-heavy Nasdaq composite index rose Thursday by 61 points, or 3.9 percent, to 1,652, its highest finish of the year, before markets closed for the Easter long weekend.

Cisco's Thursday announcement that it will buy application management vendor Tidal Software for about US$105 million is another sign that cash-rich companies looking to expand their lines of business are taking advantage of the recession to go shopping.

Cisco has long said it is committed to a growth rate between 12 percent and 17 percent. To achieve this, it needs to expand beyond its strength in its core networking market. With the Tidal buy, it gains expertise in real-time applications performance optimization, helping it to challenge the likes of IBM and BMC in the data center.

Investors seemed to like the story, pushing up Cisco shares by $0.69 to close at $17.82 Thursday.

Other M&A activity is in the works in the networking and carrier equipment arena. Nokia Siemens Networks, Avaya and Siemens Enterprise Communications are circling beleaguered Nortel Networks, The Wall Street Journal reported Wednesday. Nokia no doubt sees a potentially cut-rate opportunity to make inroads into the North American market.

Elsewhere on the networking front, Juniper Networks on Tuesday released preliminary first-quarter results, pointing to lower-than-expected sales to service providers. Revenue is now forecast to be between $760 million and $765 million, compared to prior expectations of $800 million to $830 million. Analysts had estimated revenue of $794.32 million. But Juniper also said that, thanks to cost-cutting moves, earnings would be $0.16 to $0.17 per share, raising the bottom end of the company's guidance range of $0.15 to $0.17.

Investors were able to see past the sales shortfall, pushing up Juniper shares to $17.51 Wednesday, well above the Tuesday closing price of $15.62. This suggests that some IT investors are looking beyond the tough times that are sure to continue in the next few quarters, rewarding companies that appear to be positioning themselves for an upswing in spending late this year or next year.

Increasing confidence could also be seen in Qwest's new debt issuance this week. The company said it raised $750 million in new debt Tuesday, which it will use to pay down nearer-term debt it has coming due. Qwest originally planned to issue $300 million worth of debt notes, but demand from institutional investors was big enough to allow the larger offering. A willingness on the part of big investors to buy into a telecom company's debt at this point indicates increasing confidence that the financial sector and credit markets will stabilize, freeing corporate buyers to start snapping up technology and services again.

Qwest shares ticked up Thursday by $0.03 to close at $3.83.

Before tech buying begins in earnest again, there will most likely be another few quarters of decline. Global chip revenue, for example, is expected to reach $194.5 billion in 2009, a 24.1 percent decline from 2008 revenue, according to a Gartner report this week.

But IT investors appear to be increasingly looking beyond the near term, starting to buy into companies that are setting themselves up for a return to strength next year. The Nasdaq is up 4.8 percent for the year, and stocks surged on broader indexes Thursday to their highest levels in two months. A Wells Fargo & Co. earnings report that beat analyst expectations due to higher-than-expected results in its lending business helped restore confidence that the banking sector may be stabilizing.

As earnings season gets under way for tech companies next week, sharp-eyed investors will be on the lookout for guidance that can bolster -- or dash -- hopes for later this year.

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