With the Nasdaq Composite Index down from its third-quarter peak, and several high-profile IT stocks under scrutiny this week, technology investors appear to be somewhat skittish about how vendors will fare in the next few quarters as general economic concerns grow. Recent IT spending surveys, however, shed some light on the matter and are generally upbeat.
Apple Computer and Advanced Micro Devices kicked off earnings season this week, and illustrated investor nervousness. Apple Tuesday announced earnings that were better than expected, beating the consensus forecast of analysts polled by First Call by US$0.01. However, iPod sales were lower than expected, fueling fresh concern that the company will not be able to rely on the device for further growth. As a result, though its share price recovered later in the week, Apple shares (AAPL) dropped Wednesday by US$1.65 to US$49.94.
AMD shares (AMD) also declined Wednesday, after its Tuesday earnings report, even though at US$0.18 per share, it blew past the US$0.08 per share that analysts were forecasting. The problem? Even though sales exceeded expectations, profit margins were deemed to be low, leading to some concern about cost management.
Cost and supply-chain management, along with concerns about user uptake, has led to several downgrades in the chip sector. For example, Prudential Equity Group Tuesday downgraded Intel stock from "neutral" to "underweight," leading Intel (INTC) shares to decline by US$0.18 to close at US$23.24 Wednesday.
Meanwhile, the Nasdaq Composite Index, laden with IT stocks, has sunk down to the 2050-point level, about where it was before the July run-up that sent it to its highest point in four years.
A batch of recent surveys, however, indicates that IT spending will not slacken in the near term -- which would bode well for vendor coffers. Last week, for example, in a poll of IT executives released by CIO Magazine, corporate managers forecast IT spending to rise 9.3 percent over the next 12 months, as companies invest in hardware, telecom equipment and storage devices. A forecast released by Gartner this week, meanwhile, said that small and medium-size businesses would fuel IT spending in the U.S. by 5.5 percent overall in 2006. For its part, Forrester Research this week forecast IT spending to match, at 7 percent, overall U.S. gross domestic product growth in 2006.
Looking out a little further, though, Forrester does expect that macroeconomic concerns about rising oil prices, higher interest rates, and a slower housing market will take a toll on tech spending.
"It's apparent that as the economy slows, so does tech spending, though there is a lag of a quarter or two between an economic slowdown and its effect on technology spending," said Andrew Bartels, vice president at Forrester.
The general concerns about the economy that are casting shadows on even some upbeat earnings reports, then, may start to really have an effect on the tech market next year, even though users are showing resilience to economic problems at this point.
Later in the decade, as mobile computing devices become even more ubiquitous and adaptable and service-oriented software architecture is well in place throughout enterprises, tech will undergo another boom, with growth rates in the 9 percent range, Bartels said.
Until then, strap in for a bumpy ride.