Wall Street Beat: Economic uncertainty continues to plague tech

Chances appear higher for a recession that could put a damper on purchases for IT

Is tech heading into another downturn? Market watchers see signs of hope for the end of the year but they are hedging their bets.

The risk of a tech downturn following a widening recession in Europe and slower economic growth in the U.S. and Asia have risen to around 30 percent, from about 20 percent a few months ago, according to Andrew Bartels, chief economist at Forrester Research.

While Bartels still has what he calls a moderately positive outlook for IT, he said in an interview Friday that he most likely will cut his forecast for tech purchases when Forrester issues its revised forecast next month.

Bartels thinks that a downward revision for U.S. purchases of technology, from 7 percent growth to about 5.5 percent or 6 percent, is called for. Taking Asia and Europe into account, a 1 percent downward revision for global tech purchases, to a growth rate of about 5 percent or 6 percent, will likely be in order. In its January forecast Forrester said that on a global basis, IT purchases will be US$2.1 trillion in 2012.

Meanwhile, tech investor confidence in U.S. IT companies is slipping. Despite a 0.62 percent uptick in the Nasdaq Computer Index as well as gains in the Dow Jones Industrials and Standard and Poor's indexes Friday afternoon, share prices of computer companies listed on the Nasdaq are about 10 percent lower in aggregate than they were two months ago.

"Investors are nervous," wrote Canaccord Genuity analyst Richard Davis in a research note Friday. "The weakness in the market has decisively shifted investors' gaze from 'how high is up' to 'how low can it go?' "

In an earlier note, Davis said "Sadly, the sub-10% probability of a wipeout in Europe that pulls the world economy back into recession is now closer to 25%."

U.S. President Barack Obama held a press conference Friday to address the European economic crisis, explaining why it matters to American companies. "This matters to us because Europe is our largest trading partner," Obama said. "If Europe goes into a recession that means we're selling fewer goods and fewer services."

In the U.S., economic indicators have been confusing. Thursday the U.S. Labor Department reported that new requests for jobless benefits fell last week for the first time in over a month. But late last week the Labor Department said that in May the unemployment rate edged up by a 0.1 percentage point to 8.2 percent.

The mixed news has sparked cuts in forecasts for tech vendor revenue. The forecast for IBM revenue this year was cut from $109.1 billion to $108 billion by Sterne Agee analyst Shaw Wu this week. "Our recent supply chain and industry checks indicate Europe, not surprisingly, is weakening due to greater uncertainty," he said.

There are glimmers of hope, however. For IBM, a focus on software, high-margin products and services will allow the company to maintain its earnings per share, forecast by Wu to be $15.15 for 2012.

In addition, analysts have said that revenue forecasts have already taken into account economic headwinds, and at this point negative trends may have been given too much weight by investors.

Sterne Agee analyst Vijay Rakesh wrote in a research report that bad economic news has caused investors to oversell chip stocks and that valuations are low.

"We believe while macro headwinds have increased, fundamental trends still remain intact -- implying new product cycles, solid marketshare and cost-margin structures," Rakesh wrote. "Valuation more than reflects the macro slowdown and stocks should be buying opportunities."

An IHS iSuppli Inventory Insider Market Brief this week reinforced a positive outlook on chips. The report found that total semiconductor inventory as a percentage of suppliers' revenue amounted to 50 percent in the first quarter, up from 47.8 percent in the fourth quarter.

"The higher inventory numbers among semiconductor suppliers for the first quarter of 2012 represent a signal of better things to come," said IHS. "There was an increasing level of inventory both among chip suppliers and customers, indicating that both the supply and demand sides of the business believe that the environment in the electronics market has turned positive."

Meanwhile, the software sector is likely to provide some near-term relief. "The good news is that we still are not seeing slowdowns for Cloud software firms," noted Canaccord's Davis. "We believe there is a good chance of a relief rally in late June because firms like Oracle are likely to post better than feared quarters."

However, as Davis went on to note, until the large-scale economic questions are resolved, uncertainty will continue to plague tech.

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Marc Ferranti

IDG News Service
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