Wall Street Beat: Uncertainty Hits IT in 2nd Quarter
Uncertainty about the global economy has put a damper on tech vendor share prices, which ended the first half on Wednesday in negative territory for the year even though bellwether IT suppliers have been reporting strong -- and in some cases, record -- sales.
The past three months have been the worst quarter for U.S. exchanges and economic indexes since late 2008, during the depths of the recession. It was also the worst second quarter for the markets since 2002, during the dot-com bust.
The biggest economic concern recently has been that skyrocketing debt in Mediterranean countries, especially Greece and Spain, will hold back growth in the European Union, putting a damper on global recovery. Anemic job growth in the U.S. hasn't helped the economic outlook.
Though IT bellwethers such as IBM, Intel, Google and Apple recorded exceptionally strong year-over-year sales increases for the first quarter, tech has not been immune to the general unease about the overall economy.
In fact, so far this year, share prices for computer and telecom companies have been hit harder than stocks in other sectors. For example, while the broad Dow Jones Composite index was down 5.96 percent for the first half, Nasdaq computer stocks were down by 8.94 percent and the exchange's telecommunications companies were down by 13.62 percent. New York Stock Exchange figures tell a similar story: NYSE stocks in the tech/media/telecom category were down by 9.56 percent.
The retrenchment on the markets has even affected tech-category leaders. Google, for example, closed Thursday, the first day of the third quarter, at US$439, well below its 52-week high of $629. Apple, which by the weekend had sold 1.7 million iPhone 4 devices after officially releasing them just a week ago, closed at $248, down from its 52-week high of $279.
Fresh concerns arose in the U.S. Thursday as the government announced that initial claims for jobless benefits rose by 13,000 last week. Economists had been expecting a decline.
Up until now, IT market analysts have been steadfast in their optimism, leading to something of a discrepancy between IT sales forecasts and investor worries about the overall economy.
On Thursday, however, Gartner trimmed its worldwide IT spending forecast for 2010 to $3.35 trillion, calling for 3.9 percent growth, down from prior expectations of 5.3 percent growth. Much of the decline in the forecast is due to the falling value of the euro, which will have a negative impact on sales figures quoted in dollars. However, Europe's economic problems will also have an impact on IT spending, according to Richard Gordon, research vice president at Gartner.
"Longer-term, public-sector spending will be curtailed in Europe as governments struggle to bring budget deficits under control during the next five years and to reduce debt during the next 10 years," Gordon said in the new Gartner IT spending report.
Though Gordon stressed that the global economy appears stable and that the outlook for IT spending in major categories remains positive, the European debt crisis means that "IT spending decisions are still scrutinized for value."
Industry insiders agree that, while this year should see solid IT spending growth over last year, volume IT buyers have not necessarily been given blank checks by CEOs and CFOs.
"CEO and CFOs are involved in the decision-making process, asking the extra questions, like, 'Do we really need to do this...'" said David Fisher, senior vice president and general manager of Forsythe Solutions Group, a technology consulting, IT infrastructure and integration company.
One recent trend has been for companies to ask for some sort of estoppel clause in IT contracts, which would allow them to efficiently bring projects to a halt if the economy goes south, Fisher noted. Nevertheless, that sort of action is not likely to be taken unless the economy goes back into full-bore recession, Fisher said, adding that after a slow start this year, Forsythe's business has picked up.
"We're cautiously optimistic," Fisher said.
Virtually all industry watchers agree that the hardware sector will help buoy IT this year, as consumers and large companies alike scoop up new computers after delaying purchases during the recession. The recovery boosted PC shipments in the first quarter, IDC said in a recent market report. Shipments rose by 27.1 percent in the first quarter compared with the year-earlier period, IDC said.
The Gartner report on Thursday put total 2010 global spending on all hardware at $365 billion, up 9.1 percent from last year.
Meanwhile, hardware and components vendors continue to report especially strong earnings. For example, Micron Technology on Tuesday announced its strongest quarterly profit in years, fueled by DRAM and NAND flash memory chip sales. For the quarter ending June 3, the company reported a net profit of US$939 million, compared to a net loss of $301 million during the same period last year, on sales of $2.29 billion -- more than double the revenue in the year-earlier quarter.
Nevertheless, tech shares have been sliding along with stock prices in other sectors ever since April 23, when the Nasdaq hit a 52-week high of 2530. On Thursday, the exchange closed at 2101. However, as tech bellwethers start reporting second-quarter results over the next few weeks, another round of strong sales figures could go a long way toward bolstering confidence.