Troubles seen broadly hitting technology sector
BOSTON - Hopes are evaporating that top U.S. technology companies will offer a safe harbor this year from the economic storms swirling across Europe, Asia and the United States.
Investors should brace for some of the biggest names in software and hardware -- from Microsoft Corp and IBM to Intel Corp -- to disappoint when Big Tech begins reporting numbers next week, analysts said.
The trio's shares are all in the red for July, in the wake of earnings warnings over the past week from smaller peers, including Advanced Micro Devices Inc, Applied Materials Inc and Informatica Corp.
Corporate IT budgets have historically proved more resilient to worsening macro-economic conditions than other kinds of spending, because businesses invest on the assumption that technology boosts productivity and helps save them costs over the long term.
But investors may have misjudged the depth of the European crisis, and with once-reliable-as-clockwork Chinese growth waning, demand in other emerging markets has not picked up enough of the slack.
The profit warnings could signal a broader pullback in orders, which means that Wall Street's earnings projections now appear over-optimistic to some outside experts.
"I don't think the companies or the market anticipated the kind of slowdown like the one we are going to see in the second half," said Fred Hickey, editor of the High-Tech Strategist Newsletter for investors.
"Companies haven't had a chance to adjust estimates yet and they will. That's coming," said Hickey, who has been following the tech industry since the 1980s.
The one bright spot is Apple Inc, which still has many fans on Wall Street. The iPhone and iPad maker is one of the few major tech stocks to have gained in July, to the tune of 4 percent.
Apple has beaten analysts' earnings forecasts seven out of the past eight quarters by at least 12 percent. Last quarter, it reported earnings 22.5 percent above Wall Street estimates.
Its performance has propped up the entire sector and analysts expect a new iPhone this year to keep that up.
Thomson Reuters Starmine SmartEstimates, which accords higher weight to the timeliest forecasts from historically more accurate analysts, pegs Apple as likely to report earnings of more than 1 percent above the Street's average forecast. In contrast, Microsoft, which is preparing to launch Windows 8 and tablets, may report earnings 0.7 percent below the average.
"Guidance could turn out to be very conservative given momentum with new Macs, a potential iPad mini and ongoing success with the new iPad," Barclays analyst Ben Reitzes said in a research note. Apple said the latest iPad will hit Chinese store shelves on July 20.
ESTIMATES SEEN DROPPING
Apple aside, market watchers expect the economic malaise will broadly hit technology companies in the second half of the year, even at firms that managed to squeak by in the second quarter and avoid issuing preliminary earnings warnings.
Over the past three months, analysts have largely held on to their second-quarter earnings forecasts for technology and telecommunications companies, while cutting estimates in other sectors. Now many may have to make up for that oversight.
An IDC survey of chief information officers (CIOs) at about 250 U.S. companies conducted two weeks ago found, on average, that they expected their budgets to decrease for the first time since early 2009.
"There is this sense among CIOs that things have slowed down and they are going to have to think about ways of cutting back," said IDC analyst Stephen Minton.
Analysts currently forecast companies in the S&P 500 Index will report profit growth of 5.8 percent in the second quarter, with technology earnings growing at 7.9 percent, according to Thomson Reuters data.
They are more optimistic about prospects for the second half and that's where some expect cuts to come.
Analysts forecast third-quarter earnings growth of 12.9 percent for the S&P 500's technology index and fourth-quarter growth of 14.9 percent.
Companies at risk in the second half include services giant IBM, No. 1 chipmaker Intel, as well as software makers including Microsoft and VMware Inc, analysts said.
It's not a surprise to some that sentiment has shifted so quickly.
Historically when businesses have frozen or cut technology budgets, they have sometimes done so suddenly, taking tech companies and Wall Street by surprise. That process appears to have begun.
"Sentiment is turning into reality," said Cliff Waldman, senior economist with the Manufacturers Alliance for Productivity and Innovation. "Negative sentiment is truly starting to affect investment spending."
When it issued its warning last week, Informatica said business conditions "dramatically" worsened in June with customers scrutinizing deals more closely.. Applied Materials warned on Tuesday that it expected weak demand from chipmakers to put a damper on sales through at least the third quarter.
Mark Luschini, chief investment strategist at Janney Montgomery Scott, which manages about $54 billion, blames the tech turmoil on Europe, a strengthening U.S. dollar, which reduces the revenue contribution from overseas sales, and concerns about a U.S. tax increase.
"If there is no improvement on domestic data points, or news from Europe that the saga has ended, why should there be a change?" Luschini said.