Tech Earnings Have Investors on Edge

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Belt-Tightening Factor

And, as evidenced by IBM's update on Jan. 14, U.S. tech companies with substantial foreign sales may suffer even less of a jolt from a domestic recession. Worldwide, tech spending is still projected to grow almost as much as in 2007, driven by strong demand for smartphones, storage devices, and software. "Large bellwethers with international exposure would probably fare better in this type of an environment," Kessler says. IBM (IBM), seemingly tired of seeing its shares pounded, preempted its quarterly report by just three days to say it posted a better-than-expected 24% jump in fourth-quarter earnings per share. The gain was fueled by overseas sales and the dollar's weakness, which made that revenue more valuable in dollars. Overall, quarterly revenues rose 10%, to $28.9 billion, exceeding analyst forecasts of $27.8 billion.

It's also encouraging that, so far, few companies have issued early warnings about their quarterly results. "As of now, there are no indications of a massive slowdown," Kessler says.

Still, as the technology industry has a way of evolving more rapidly than other sectors, the slowdown might not produce the same winners and losers as in the past. Consider the telecommunications sector. Back in 2001, AT&T (T) and Verizon (VZ) were considered defensive plays—still stodgy utilities collecting monthly phone bills like clockwork. Indeed, during the 2001 recession, Verizon's stock only fell 3%. After all, even consumers in deep financial trouble weren't likely to abandon their home phones to cut corners. But seven years later, consumers rely so heavily on cell phones that many might be more apt to cut off their home phones first, says Craig Moffett, an analyst with Sanford C. Bernstein.

While Verizon and AT&T can ease that pain as the nation's two biggest cellular-phone carriers, both may also see wireless subscriber growth slow in a tougher economy. Recession belt-tightening might also lead some consumers to downsize their cable TV service, a business Verizon and AT&T have entered over the past several years. And, as suggested by AT&T CEO Randall Stephenson on Jan. 8 to analysts, recession-leery consumers may be growing hesitant about paying for speedier broadband Internet services. "We are really seeing some softness," he said. A day later, Verizon President Dennis Strigl told analysts that his company has not been impacted by the economic downturn.

No Sure Thing

Software is another example of a sector that's changed dramatically since the last recession. Take Oracle (ORCL). Until a few years ago, its earnings were dominated by sales of corporate database software, a prime target for cost-cutting by businesses grappling with hard times. But today, recurring, predictable revenues from Oracle customers that want to keep their software in tip-top shape account for nearly half of the company's sales. "Oracle is much more stable," says Andy Miedler, senior technology analyst at Edward Jones.

Elsewhere in the technology sector, alternative energy stocks may post gains even in a recession if oil prices remain high. And outsourcers providing back-office services for other companies may, once again, prove to be an effective defensive play. On Jan. 8, Lehman Brothers (LEH) upgraded Wipro (WIT) to overweight, predicting the Indian company will post strong third-quarter results on Jan. 18. Analysts polled by Thomson Financial expect the outsourcer to roughly double its quarterly revenues, to $1.2 billion, year over year. Miedler believes that Accenture (ACN) would benefit from further outsourcing and consulting during a downturn as well.

But, at the end of the day, technology will never be a sector for those without stronger stomachs. "Technology is in much better shape than it was before," Miedler says. "But it's certainly not health care or a utility that's needed in good times and bad."

Kharif is a senior writer with BusinessWeek.com in Portland, Ore.

With Spencer Ante in New York and Roger O. Crockett in Chicago.