Wall Street Beat: IT Will Have Winners, Losers

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Though signs for IT remain positive this year, worries about the economy sapped investor confidence this week as a wide range of businesses, including big computer industry vendors, suffered a drop in share value.

After a strong earnings season there still seems to be underlying confidence in tech, as computer vendors listed on the Nasdaq are up a total of 2.26 percent for the year. Worries about slowing retail sales and employment growth, however, have hit IT vendors as well.

As of Friday afternoon, the tech-heavy Nasdaq was down 21 points from its Thursday close. On a percentage basis it was a worse drop than the Dow Jones Industrials or the S&P 500 suffered. On Thursday, however, the Dow suffered its worst one-day decline in almost a year.

On Friday, U.S. government data showed that 54,000 jobs were added last month, the smallest increase since September. Meanwhile, the unemployment rate rose to 9.1 percent, up from 9 percent in April.

Even market darling Apple, which generated excitement this week by announcing that Steve Jobs would give the company's Worldwide Developers Conference keynote next week, was down by US$1.91 to $344.14 Friday afternoon. IBM, whose sales for the most recent quarter were $24.6 billion, up 8 percent year over year, was down $0.75 at $165.35. EMC, which reported record profit and revenue in it latest quarter on sales of $4.6 billion, was down $0.27 to $28.09.

On the whole, signs for IT sales, especially software, still appear to be good. For example, a report from Forrester Research this week showed that for the first time ever, companies worldwide plan to spend as much on new software as they do on system maintenance. Business intelligence is likely to be a big winner this year, according to the report, with 38 percent of survey respondents saying they plan to install new BI software or build out current systems.

Forrester has said that it expects overall software purchases to rise 11.5 percent, compared to an 8.3 percent increase in computer equipment spending this year.

Several bellwether software vendors are sticking to aggressive growth plans. For example, SAP, which has been making moves to expand its BI offerings, remains confident it will reach €20 billion (US$35 billion) in revenue by 2015, up from €12.5 billion last year, without relying on major acquisitions for that growth, co-CEO Bill McDermott said at an investor conference in New York on Friday.

"The number we've set is based on other than a tuck-in [acquisition] here and there, which is the normal course of business, organic growth," McDermott said. A US$750 million debt placement SAP announced Friday will be used to refinance existing debt.

Last year, SAP purchased Sybase for US$5.8 billion, in the process gaining an array of mobile and database technologies. SAP is also betting on big sales from new products like its HANA (High Performance Analytic Appliance), which is powered by an in-memory computing engine. HANA has a substantial pipeline of prospective sales that is growing by some €10 million per week, McDermott said.

There also appears to be underlying confidence in social media technology, judging from the excitement several IPOs have raised recently. Business-contact social media company LinkedIn made a stunning market debut two weeks ago, shares doubling on its first day of trading, closing at US$94.25, up from its $45 price. Though shares have slumped since then, trading Friday at $77.65, they are still well above the initial IPO asking price.

On Thursday, group-buying site Groupon filed IPO papers, saying it hoped to raise $750 million.

But market data and an apparent slowdown in the recovery suggest that there will be winners and losers in IT this year.

Worldwide PC shipments totaled 81.3 million units in the first quarter of 2011, a 0.3 percent year-over-year decline, according to a recent IHS iSuppli report.

In the smartphone market, meanwhile, a rising tide may not lift all boats. On Tuesday, Nokia lowered its forecast for the current quarter. The company said it expects Devices & Services net sales to be below its previously expected range of €6.1 billion to €6.6 billion (US$8.7 billion to $9.4 billion) for the second quarter. The problem is the company is suffering at the hands of strong competitors such as Apple in the high-end market.

Canaccord Genuity communications analyst Michael Walkley lowered his rating on Nokia from buy to hold. In addition, Walkley lowered his price target on Nokia shares from $11 to $8 and reduced his 2011 and 2012 earnings estimates.

While Nokia's agreement with Microsoft to use Windows Phone OS in future devices looks promising, the big question is whether it will be too little, too late to boost the phone maker's flagging sales.

"While we maintain our belief the Nokia-Microsoft partnership is best positioned to potentially create a third viable smartphone ecosystem, we are increasingly concerned about sales for Nokia's Symbian devices during the transition period," Walkley said.

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