Magazine

Commentary: Tech: Not Much of a Wave in Sight


It has been an abysmal 12 months for technology companies. A year ago, PC maker Gateway Inc. (GTW) signaled the beginning of the tech bust when it revealed that Thanksgiving weekend sales ran 30% less than expected. During the past few weeks, however, there's been a steady drumroll of upbeat news heralding what seems like renewed life in tech land. Indeed, it looks like the long decline in the tech sector may finally have hit bottom. But does that mean the long-awaited tech turnaround is at hand? Well, probably not for a while.

True, there's been no shortage of good news of late. It started modestly in early November, when Cisco Systems Inc. (CSCO) reported a 3% revenue increase over the previous quarter. A few weeks later, Hewlett-Packard Co. (HWP) announced that it sold 20% more PCs in stores this Thanksgiving weekend than last. And on Nov. 29, the Commerce Dept. said that orders for computers and semiconductors are coming in at a slightly higher rate than shipments going out. Even demand for memory chips has increased enough that the biggest producer, Korea's Samsung Electronics Co. (SSNLF), raised prices by 10% on Dec. 5. Moreover, surveys of corporations show that they may buy more software and computers in the coming months.

"BUBBLE II." These signs of life have investors scrambling to get in on the action. Technology indices are up 50% or more since late September, and some tech companies have fared even better. Both Intel Corp. (INTC) and Sun Microsystems Inc. (SUNW) have seen their shares soar more than 60% over the past two months. But that's putting tech stocks back into troublesome territory. The forward price-earnings ratio for the top 100 tech companies is now perched at 43, just below its all-time peak of 47. "It feels like Bubble II," warns Edward Yardeni, chief investment strategist at Deutsche Banc Alex. Brown.

Problem is, the excitement is premature. While a bottom may be at hand, it's too early to predict when the engine that powered the 1990s boom will be ready to start chugging again. The tech sector is still only using 61% of its manufacturing capacity. Until a major corporate buying spree kicks in enough to push utilization up to 80% and above, profits will remain anemic.

Don't expect those factories to fill up anytime soon. Info-tech spending increases of 9.4% in 1999 and 11.1% in 2000 were fueled by a rare combination of Internet hoopla, worries over Y2K, and unparalleled economic growth. But tech spending is expected to contract by 3% this year and only grow 4% next, according to market researcher IDC. "The risk here is that you end up bumping along the bottom for a while," says Merrill Lynch & Co. technology strategist Steven Milunovich.

For corporate IT buyers to get back into the market in a big way, they will first have to record their own improved profits, and that probably won't happen until midyear at least--when their cost-cutting moves take effect and demand for their products and services starts to climb. Some major consumers of technology--airlines, insurance companies, and even tech companies themselves--may delay their purchases even longer. Says Lawrence J. Ellison, chairman of software maker Oracle Corp. (ORCL) "I believe we'll start seeing some growth in the next year, but I can't forecast any closer than that."

LOW GEAR. Things remain even bleaker in the telecom industry, one of the biggest buyers of tech gear. Telecom accounts for 10% of all IT purchases. Now, Merrill Lynch expects capital expenditures for U.S. carriers to decline 12% this year, 20% next year, and another 6% in 2003. Sprint Corp. alone will cut capital spending 30% next year because of slack demand.

When demand does strengthen, analysts expect companies will spend their IT budgets on wireless communications, supply-chain management software, and basic Internet gear that will help them keep ahead of their competition. But even then, no one is looking for a return of '90s-style boom times. Without major new innovations to drive demand, like the Internet and PCs did in the '90s, growth in the tech sector is likely to remain in low gear for most of 2002. Still, that would be a far cry better than the truly dark days of 2001. By Steve Hamm

With Ben Elgin and Jim Kerstetter in San Mateo, Calif.


Hollywood Goes YouTube
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus