July 11, 2012 / 4:28 AM / 6 years ago

Analysis: Tech Inc's invincible aura fades

(Reuters) - Hopes are evaporating that leading technology companies will offer a safe harbor this year from the economic storms swirling across Europe, Asia and the United States.

The sign at the IBM facility near Boulder, Colorado is seen with the Boulder Flatiron mountains in the background, September 8, 2009. REUTERS/Rick Wilking

Investors should brace for some of the biggest names in U.S. software and hardware — from Microsoft Corp and IBM to Intel Corp — to disappoint when Big Tech begins reporting quarterly earnings next week, analysts said.

The trio’s shares are all in the red for July, in the wake of earnings warnings over the past week from smaller peers, including Advanced Micro Devices Inc, Applied Materials Inc and Informatica Corp.

Corporate IT budgets have historically proved more resilient to worsening macroeconomic conditions than other kinds of spending, because businesses invest on the assumption that technology boosts productivity and helps save them costs over the long term.

But investors may have misjudged the depth of the European crisis, and with once-reliable-as-clockwork Chinese growth waning, demand in other emerging markets has not picked up enough of the slack.

The profit warnings could signal a broader pullback in orders, which means that Wall Street’s earnings projections now appear over-optimistic to some outside experts.

“I don’t think the companies or the market anticipated the kind of slowdown like the one we are going to see in the second half,” said Fred Hickey, editor of the High-Tech Strategist Newsletter for investors. “Companies haven’t had a chance to adjust estimates yet and they will. That’s coming,” said Hickey, who has been following the tech industry since the 1980s.


The sense of impending gloom is not confined to the United States.

Samsung Electronics, Asia’s top-earning tech company and the world’s leading maker of smartphones, TVs and memory chips, has predicted record quarterly profit of $5.9 billion for April-June — but its stock has slumped more than a fifth since May on concerns about the broader outlook for chip demand and the impact of the euro zone crisis on sales of its TVs and home appliances.

Since mid-June, analysts have cut by more than a quarter their earnings forecasts for LG Electronics, South Korea’s other tech heavyweight, according to Thomson Reuters Starmine SmartEstimates, which accords higher weight to the timeliest forecasts from historically more accurate analysts.

Shares of China’s Lenovo, the world’s No.2 PC maker behind Hewlett Packard, have retreated to 5-month lows with brokers downgrading their outlooks for the company as global economic weakness damps demand for personal computers.

In Japan, a fast fading powerhouse in consumer electronics and technological innovation, shares in Sony Corp and Panasonic Corp are mired near more than three-decade lows as investors fret over their ability to regain profitability in today’s hostile macro environment and against tough competition from nimbler rivals in South Korea and Taiwan.


The one bright spot is Apple Inc, which still has many fans on Wall Street. The iPhone and iPad maker is one of the few major tech stocks to have gained in July, up 4 percent.

Apple has beaten analysts’ earnings forecasts in seven of the past eight quarters by at least 12 percent. Last quarter, it reported earnings 22.5 percent above Wall Street estimates. Its performance has propped up the entire sector and analysts expect a new iPhone this year to keep that up.

Apple is likely to report earnings of more than 1 percent above the Street’s average forecast, according to StarMine SmartEstimates. In contrast, Microsoft, which is preparing to launch the Windows 8 operating system and its first tablet computers, may report earnings 0.7 percent below the average.

“Guidance could turn out to be very conservative given momentum with new Macs, a potential iPad mini and ongoing success with the new iPad,” Barclays analyst Ben Reitzes said in a research note. Apple said the latest iPad will hit Chinese store shelves on July 20.

Apple aside, market watchers expect the economic malaise will broadly hit technology companies in the second half of the year, even at firms that managed to squeak by in the second quarter and avoid issuing preliminary earnings warnings.

Over the past three months, analysts have largely held on to their second-quarter earnings forecasts for technology and telecommunications companies, while cutting estimates in other sectors. Now many may have to make up for that oversight.

An IDC survey of chief information officers (CIOs) at about 250 U.S. companies conducted two weeks ago found, on average, that they expected their budgets to decrease for the first time since early 2009.

“There is this sense among CIOs that things have slowed down and they are going to have to think about ways of cutting back,” said IDC analyst Stephen Minton.

Analysts currently forecast companies in the S&P 500 Index will report profit growth of 5.8 percent in the second quarter, with technology earnings growing at 7.9 percent, according to Thomson Reuters data.

They are more optimistic about prospects for the second half and that’s where some expect cuts to come.

Analysts forecast third-quarter earnings growth of 12.9 percent for the S&P 500’s technology index and fourth-quarter growth of 14.9 percent.


Companies at risk in the second half include services giant IBM, No. 1 chipmaker Intel, as well as software makers including Microsoft and VMware Inc, analysts said.

It’s not a surprise to some that sentiment has shifted so quickly.

Historically when businesses have frozen or cut technology budgets, they have sometimes done so suddenly, taking tech companies and Wall Street by surprise. That process appears to have begun.

“Sentiment is turning into reality,” said Cliff Waldman, senior economist with the Manufacturers Alliance for Productivity and Innovation. “Negative sentiment is truly starting to affect investment spending.”

When it issued its warning last week, Informatica said business conditions “dramatically” worsened in June with customers scrutinizing deals more closely.. Applied Materials warned on Tuesday that it expected weak demand from chipmakers to put a damper on sales through at least the third quarter.

“Demand is weaker than expected in Europe and China, and this makes chipmakers delay or cancel equipment orders,” said James Song, analyst at KDB Daewoo Securities in Seoul. “They are slowing investment in capacity expansion or technology migration.”

Mark Luschini, chief investment strategist at Janney Montgomery Scott, which manages about $54 billion, blames the tech turmoil on Europe, a strengthening U.S. dollar, which reduces the revenue contribution from overseas sales, and concerns about a U.S. tax increase.

“If there is no improvement on domestic data points, or news from Europe that the saga has ended, why should there be a change?” Luschini said.

Additional reporting by Poornima Gupta, Editing by Edwin Chan, Tiffany Wu and Ian Geoghegan

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