Wall Street Beat: Confidence in tech sector high despite mixed earnings

Nasdaq tech shares hit their highest point since the third quarter of 2000, despite bad news from Cisco and warning from Lenovo

Despite some shadows cast by Lenovo and Cisco earnings, IT stocks have had a strong week overall, with Nasdaq tech stocks reaching their highest point since the third quarter of 2000, during the dot-com bust.

On Wednesday, Lenovo reported that for the fourth quarter, net profit jumped 30 percent year over year to US$265 million, while net sales rose 15 percent to $10.8 billion. Tablets were star performers, as sales of the devices increased 326 percent year-over-year to 3.4 million units.

Considering the global weakness in the overall hardware market, the company had good news for PCs as well. The company said it shipped 17.3 million mobile devices in the quarter, up from 15.3 million PCs a year earlier.

The company has been also been growing by acquisition, recently announcing planned purchases of Google's Motorola Mobility and IBM's low-end server unit. The bad news is that the company said it expects its profit will drop in the short-term with the proposed acquisitions.

Though the company's shares have faltered on the news of the aggressive purchases, it is not traded on major U.S. exchanges.

Networking bellwether Cisco Systems also announced earnings Wednesday, reporting that profit for the three months ending Jan. 25 plunged by 54 percent to $1.4 billion. Revenue declined by nearly 8 percent to $11.2 billion.

In addition, revenue for the current quarter will again be lower than it was a year earlier, by between 6 percent and 8 percent, Chairman and CEO John Chambers said on a conference call.

Reflecting concerns that have hit the stock market since the start of the year, Chambers said that in emerging markets such as Brazil, Russia, India, China and Mexico, product orders were down by about 10 percent.

But Cisco expects growth to come back later this year as it adjusts its product line to take advantage of the increasing number of devices connected to the Internet. Cisco has been in transition as it adjusts to this trend, he said.

"In our view, this next wave of the Internet, the Internet of Everything, will encompass every technology transition we are seeing in the market today, with the network squarely at the center," Chambers said on the call. "We are building the platform for the Internet of Everything with scale and security to address the unparalleled complexity requirements. We plan to continue to disrupt the market and disrupt ourselves to deliver the value and solutions our customers require."

Market research reports back up the notion that the "Internet of things" is expanding rapidly. "The global market for connected devices that allow users to access the Internet is set to surpass 6 billion units this year, as new products including cellphones, tablets and computers enter the electronics ecosystem," according to a new report from IHS Technology.

Global production of connected equipment will total 6.18 billion units in 2014, an increase of 6 percent year over year, IHS said. "This will be the largest increase for the market in four years, surpassed only by the 10 percent hike in production during 2010, a year after the global economic recession ended," according to the report.

Reports from IDC and Gartner this week highlighted the growth of smartphones. Global smartphone sales totaled 968 million units in 2013, an increase of 42.3 percent year over year, according to Gartner. Sales of smartphones accounted for 53.6 percent of overall mobile phone sales in 2013, and exceeded annual sales of so-called feature phones for the first time, Gartner added.

On its part, IDC said smartphone sales jumped 39 percent last year to more than 1 billion handsets.

Despite some mixed earnings results over the last month, there appears to be an underlying sense of confidence in the tech sector. Sixty-seven percent of tech company CFOs surveyed recently by professional services firm BDO said they expect increased sales in 2014. That is a 15.5 percent increase from the number of respondents expressing similar sentiment in last year's poll, BDO said.

This optimism about sales appears to translate into optimism about strength in share prices.

Forty-six percent of the respondents to the BDO survey said they expect technology business valuations to rise.

"Last year was a very robust year," said Aftab Jamil, a BDO partner and leader of the Technology and Life Sciences practice. "Nintey-seven percent of the CFOs [surveyed] said they think business valuations would be at least as good if not better than last year," Jamil pointed out. "Only 3 percent said they expect valuations to decline -- that's phenomenal."

Cloud computing and wearable tech will be among the hot product categories this year, Jamil said.

The Nasdaq Computer Index closed Friday at 2,088.90, up by 2.54 points, its highest point since October 2000. The Nasdaq Composite closed at 4,244.03 up by 3.35 points.

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Marc Ferranti

IDG News Service
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