Wall Street Beat: Underlying confidence marks tech sector

Despite geopoliticial turmoil, optimism reigns for tech stocks

Another strong earthquake in Japan Thursday and rising oil prices caused turmoil in the markets this week, but there still appears to be strong underlying confidence in the tech sector.

Even though Apple shares, for example, have skyrocketed to the point where the company ranks as the second-most valued enterprise in the world after Exxon Mobile in terms of market capitalization, analysts think there's room for growth.

"Based on strong sell-through trends for both iPhone and iPad and our belief Apple is successfully leveraging its leading market position to secure component supply through the Japanese tragedy, we believe Apple will maintain dominant value share of both the tablet and smartphone markets," according to a research note from Cannaccord Genuity. "We maintain our BUY rating with an increased price target of $480 (from $460)."

Tech vendors themselves appear to be confident about the year. Seagate on Thursday declared a generous stock dividend and upbeat expectations for the quarter, which gave investors hope for continued demand for disk drives. The company said it will pay a quarterly dividend of US$0.18 per share, more than twice the average dividend, in terms of yield per share, than the average offer from tech companies, according to Standard & Poor's.

"The establishment of a quarterly dividend reflects the strength of our balance sheet and the exceptional cash generation ability of our business, as well as the confidence that the Board and the management team have in the Company's ability to generate free cash flow on a sustained basis," said Steve Luczo, Seagate CEO, in a statement.

In addition, the company said revenue for the fiscal quarter ending April 1 is expected to be $2.7 billion, higher than the $2.62 billion estimated by analysts polled by Thomson Reuters.

Seagate's announcements counter fears that drive makers will suffer as more and more users turn to tablets and other devices that use flash memory for storage.

Though Cisco's shares have been languishing, an internal memo by CEO John Chambers this week sparked a rally in shares of the network-gear giant.

In the memo, circulated Monday and made public Tuesday, Chambers said that while the company's basic strategy is sound, its "operational execution" has been spotty. "We have been slow to make decisions; we have had surprises where we should not; and we have lost the accountability that has been a hallmark of our ability to execute consistently for our customers and our shareholders. That is unacceptable," Chambers wrote.

Some analysts took this as a sign that the company would move faster to emphasize gear for enterprises. Investors have been wary of the company, which relies heavily on government spending around the world -- a sector that has cratered in the wake of the Great Recession. Cisco shares have not responded as well as other IT bellwethers to the tech rally, which started two years ago and has brought shares of most big tech vendors back to pre-recession levels.

"We consider a heightened emphasis on enterprise markets in general, and networking in particular, to be a material positive," said Barclay's Capital in a research note. After the Chambers memo was made public, Cisco shares jumped by $0.85 to close at $18.07 Wednesday.

Merger and acquisition activity has also rallied confidence in tech stocks. The market applauded Texas Instruments' announcement on Monday that it has agreed to buy National Semiconductor for $6.5 billion in an all-cash transaction. National Semiconductor will add 12,000 analog products -- which convert analog data into digital signals in smartphones and other devices -- to TI's product mix. After the announcement, TI's stock rose by $0.58 to close at $34.69 on Tuesday, and continued rising through the week.

After the U.S. major markets rose early Friday morning, they eased downward as the government moved closer to a midnight shutdown. The shutdown would be caused by the failure of Democrats and Republicans to reach a budget agreement. Still, not all tech stocks were down. Seagate was trading at $16.02, up by $1.33 late morning, while Internet star Google was up by $0.48 at $580.33.

Despite geopolitical turmoil including uprisings in the Middle East, the aftereffects of the tragic Japanese earthquakes and national debt problems in Europe, the tech sector is expected to stay strong this year.

Forrester recently raised its 2011 and 2012 IT spending estimates to forecast 8 percent growth in the U.S. in 2011, up from a 7.4 percent forecast in January, and 10.3 percent in 2012.

"We raised our forecast in spite of worries about the strength of the U.S. economic expansion as a result of higher oil and gas prices, government layoffs, and supply chain and trade disruptions from the tragic events in Japan," wrote analyst Andrew Bartels in a blog post about the forecast.

U.S. economic growth still looks solid, Bartels wrote, and "more important is the strong momentum in business purchases of technology goods and services. 2010 growth in the U.S. tech market turned out to be 8.9 percent, even better than the 8.4 percent growth we projected in April 2010."

With earnings season starting over the next few weeks, tech companies will get a chance to prove whether continued optimism is justified.

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Marc Ferranti

IDG News Service
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