Tech Stock Oasis: Can It Last?

Surprisingly, technology has been a "safe haven" from the market's subprime-driven credit woes. Will the sector escape the storm unscathed?

by Catherine Holahan

When the Dow Jones industrial average plunged 387 points on Aug. 9, Wall Street worried that the subprime mortgage crisis was finally dragging down other sectors of the economy. It's easy to see why. The real estate market, such a rock-solid investment since the tech bubble collapsed earlier this decade, had swiftly become a bad bet whose big bill has come due—prompting fears that other sectors of the economy will be forced to pay the tab, too.

But so far, despite the technology sector's well-worn reputation for swinging more wildly than the broad market in times of turmoil, tech has been a pasture of calm in recent weeks. In fact, instead of joining the chorus of worry over possible contagions from the subprime lending crisis, some leading technology companies have chirped merrily about the business outlook. Many tech stocks have retreated more gently compared with the market, and some have even risen.

Computer maker Hewlett-Packard (HPQ) reported on Aug. 16 that profits from sales of personal computers jumped 29% in the third quarter from the previous year (see BusinessWeek.com, 8/16/07, "HP: 'Firing on All Cylinders'"). The company's stock has declined 1.5% since July 19, the day before stocks took their first big dive due to credit concerns.

Safe Alternative to Housing

Shares of Cisco Systems (CSCO), however, are up slightly over the same period, fueled by a bullish earnings report and revenue forecast on Aug. 7. Most telling, shares of VMware (VMW) have more than doubled since the software maker's Aug. 14 initial public offering, from $29 to $71.30 per share, despite concerns that a credit crunch could stem business buying (see BusinessWeek.com, 8/14/07, "VMware Shrugs Off Shaky Markets").

The tech sector's relatively solid performance seems counterintuitive. After all, if people can't pay their mortgages or easily borrow against their houses, it seems to follow that they'll need to tighten their purse strings when it comes to new purchases. That would mean fewer people upgrading to new PCs, big-screen TVs, and assorted gadgets, as well as less online shopping in general. And beyond the direct hit to consumer technology spending, a general slowdown in the economy would mean less revenue for businesses that, in turn, might delay upgrades to their technology systems.

There's good reason, however, why tech companies might perform well amid current conditions. Technology companies, which traditionally do not carry much debt, are looking like a safe alternative to the housing market and the heavily leveraged financial sector. "Money has got to go somewhere," says David Geltner, director of the Massachusetts Institute of Technology's Center for Real Estate and a professor of real estate finance. "A lot of money left the tech sector in the early part of this decade and went to real estate, and now maybe some of that money will leave real estate and make its way back to tech." Geltner says the shift is already happening, as does Scott Kessler, senior director of information technology at Standard & Poors. (S&P is owned by BusinessWeek parent, The McGraw-Hill Companies (MHP).) "A lot of people have been looking to technology as somewhat of a safe haven," Kessler says.

Internet Marketing Is Cost-Effective

The optimism reaches several areas of tech, including online advertising, which some believe may actually get a boost—even as the housing slump causes some financial services companies to curtail the long-running bonanza in Web ads for the sort of risky mortgages and loans that led to the current lending crisis.