Wall Street Beat: Tech Offers Hope in Time of Turmoil

Conflicting reports about the economy caused turmoil on the markets this week, but optimistic news about companies as diverse as Hewlett-Packard and Apple, as well as continued IT vendor acquisition activity, helped keep investors more confident in tech than in other sectors.

Conflicting reports about the economy caused turmoil on the markets this week, but optimistic news about companies as diverse as Hewlett-Packard and Apple, as well as continued IT vendor acquisition activity, helped keep investors more confident in tech than in other sectors.

A U.S. Labor Department report Thursday showed that new claims for unemployment benefits rose to 576,000 last week. Meanwhile, also on Thursday, the Philadelphia Federal Reserve Bank said mid-Atlantic factory activity rose in August, for the first time in 10 months. Though the bank report, along with a rise in shares on Chinese exchanges, sparked a small rally Thursday, U.S. markets have been on a roller-coaster ride this week as reports on the economy offered mixed news.

Still, tech company shares have managed to stay ahead of the rest of the market. At midweek, the tech-heavy Nasdaq Composite index was up 25 percent for the year, while the broader Dow Jones Composite was up 4 percent and the New York Stock Exchange Composite was up 13 percent. The Nasdaq Computer index was up 40 percent and the Nasdaq Telecom index was up 37 percent.

Better-than-expected earnings reports and signs of IT spending stabilization have helped tech. Reporting quarterly financials on Tuesday, HP said net earnings dropped by 19 percent to US$1.6 billion, while revenue declined 2 percent to $27.5 billion. The results beat estimates by analysts polled by Thomson Reuters, who forecast revenue of $27.3 billion. Earnings per share excluding special costs were $0.91, edging out analyst forecasts by $0.01.

While sales of printers, a core HP business, dropped 20 percent, services revenue almost doubled thanks to the company's acquisition of EDS last year.

CEO Mark Hurd's comments and the company guidance for next quarter were another reason for optimism. "Business is stabilizing, and we are confident that HP will be an early beneficiary of an economic turnaround and will continue to outperform when conditions improve," Hurd said in a statement.

Despite the recession's impact on tech spending, certain devices such as smartphones are selling better this year than last. Apple's iPhone has helped spark the trend and is one of its main beneficiaries. RBC Capital Markets analyst Mike Abramsky this week forecast that Apple would sell 31.4 million iPhones in its 2010 fiscal year, beginning in October. In comparison, Apple sold 5.2 million iPhones in the three-month period ending June 27. The RBC analyst predicts that iPhones will account for 35 percent of the global handset market by 2012.

Apple closed at $166.33 Thursday, up by $1.73, while HP closed at $43.98, up by $0.15.

Key smaller companies are also giving hope for a return to a more stable economy. Data storage vendor NetApp, for example, reported Wednesday that quarterly earnings rose 49 percent to $51.7 million. Excluding items, NetApp earned $0.22 per share, above the average analyst forecast of $0.20 per share. NetApp's revenue fell 4 percent to $838 million, but that also beat the average analyst forecast of $829 million.

However, even though NetApp officials said they are seeing signs of a turnaround, investors punished the company for declining to offer more specific revenue guidance.

"While we believe the economy has begun to stabilize, predictability of (sales) close rates is improving but still remains somewhat limited. Therefore, we will not provide specific revenue guidance for the second quarter," said Steven Gomo, the company's chief financial officer, on a conference call. NetApp shares closed Thursday at $21.55, down by $1.34.

Meanwhile, mergers and acquisitions continue to stoke excitement in hot areas of technology. This week, social-networking site MySpace, which has lost ground to Facebook, announced it will buy iLike, a music discovery service. MySpace's parent company, News Corp., closed at $12.77 Thursday, up by $0.14.

The recession has not blunted the appetite of tech vendors -- many of whom have plenty of cash in reserves -- for acquisitions. Certain sectors are especially ripe for more M&A activity this year. On Thursday market research company Forrester released a report forecasting more acquisition activity in the market for business analytics.

IBM's plans to buy statistics and forecasting vendor SPSS will spur rivals such as Oracle and SAP to make similar acquisitions, Forrester said. Privately held statistics and business analysis vendor SAS is an especially ripe target, Forrester said.

One of the bigger acquisitions in the tech arena this year, Oracle's $7.4 billion acquisition of Sun Microsystems, was approved by the U.S. Department of Justice Thursday. The approval sent Oracle shares up by $0.16 to $22.14 in after-hours trading. Oracle is expected to mine Sun's Java technology and the company's contacts in the financial industry, a big user of database software.

With earnings season essentially over, tech shares may have an up-and-down ride along with the rest of the market over the next month or so until the next wave of quarterly reports comes in, during October. Until then, M&A is apt to provide continued excitement for IT.

Copyright © 2009 IDG Communications, Inc.

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