Tech giants' results buck economic fears
Reuters
Published: 22 Apr 2008 11:27 BST
The first week of the technology earnings season is over and many are breathing a sigh of relief because, by and large, the numbers and forecasts from some sector heavyweights were not as bad as expected.
Shares of IBM, Intel and Google all rallied after the companies posted results, though plenty of uncertainty remains, and Wall Street estimates for the second quarter may well be taken down another notch.
Intel, the world's largest chipmaker, said its core microprocessor business was "strong" at the moment. Chief executive Paul Otellini, who was in Europe two weeks ago, said he saw no red flags either there or at home.
"From an economic standpoint, the two most mature of our markets [Europe and the US] are not showing any signs of weakness," he said on the company's conference call. "I did not pick up anything."
Google and IBM said much the same thing. "We're well positioned for 2008 and beyond, regardless of the business environment," said the web-search giant's chief executive, Eric Schmidt.
"Second-quarter guidance has been fine, and estimates are generally not falling as many feared," said Justin McNichols, a portfolio manager at Osborne Partners Capital Management in San Francisco.
Some stocks may drop
But some companies may not fare as well. The weaker economy is forcing US consumers to find ways to cut their phone bills, for example, which may limit profit growth for the likes of AT&T and Verizon Communications.
Top mobile-phone maker Nokia rattled the market on Thursday by partly blaming the US economy for an estimated drop in the global mobile-phone market in euro terms in 2008.
"We're not done seeing some more pain, but that just might be in some of the specific end markets," said Henry Asher, president of New York-based money manager Northstar Group. "The consumer has pulled back so sharply."
Market research firm NPD Group on Friday released a study showing that, in just two months, the number of consumers who believe the US economy is in or heading towards a recession or slowdown rose to 84 percent from 79 percent.
"Consumers are generally the last to react to economic downturns; they don't want to halt or cut back on spending, but it is clear they're beginning to throttle back," said Marshal Cohen, NPD's chief industry analyst.
Strong sectors
Pockets of strength, though, include internet companies, as well as the video-games sector, whose companies have yet to report.
"Google's 46 percent revenue growth and eBay's out-performance on both the top and bottom lines show that the internet has yet to see adverse effects from the slowing economy," Jefferies & Co analyst Youssef Squali said. "This bodes well for the rest of the group."
Apple stock rose nine percent this week, helped by industry data that fuelled optimism over Mac sales, and rosy forecasts from Mac processor supplier Intel.
Analysts are also growing more confident that Apple will unveil a faster, sleeker iPhone at a company event in June. That should boost sales of the device and help Apple meet its target of selling 10 million units by the end of this year.
Another positive area is in video games, with US sales jumping 57 percent in March, driven by new games and sustained enthusiasm for Nintendo's Wii console.
Industry leader Electronic Arts (EA) is expected to show strong sales of games like "Burnout Paradise" and "Army of Two" when it reports quarterly earnings early next month.
EA is also bidding $2bn (£1bn) for Take-Two Interactive Software, whose "Grand Theft Auto IV" is expected to pull in between $300m and $400m in revenue within a week of its April 29 launch.
Such games drive demand for consoles from Microsoft and Sony. Nintendo sold 720,000 Wiis to US consumers in March, better than any non-holiday month.
Negativity remains
But the good news may not last. Yet to report are Apple, Microsoft, Yahoo, HP, Dell and Cisco, to name just a few.
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"Right now there is a lot of negativity out there," said John Buckingham, chief investment officer of Al Frank Asset Management. "I think the economy is going to remain weak for the next couple of quarters."
Seagate Technology, the world's largest disk-drive maker, gave a muted current-quarter forecast on Tuesday after it noticed US consumers began cutting back in late March.
"People in the US are being cautious," Seagate chief executive Bill Watkins told Reuters in an interview. "Every day they are throwing out the newspaper, there's a recession."
His view was supported by research firm IDC's estimates on Wednesday that US PC unit shipments grew only 3.5 percent in the first quarter, down from eight percent growth in 2007.
"In my view, there's still going to be some turbulence, probably until sometime in the summer or as late as mid-fall," said Jerry Dodson, president and chief investment officer of San Francisco-based Parnassus Investments. "You're still talking about a weak economy for most of the year."
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