TechWeek: Great Expectations

"Shows improvement" is a comment that looks good on your kid's report card -- but it doesn't cut much muster on Wall Street.

Consider the rough treatment that Salesforce.com(CRM) got this week. The San Francisco-based software company quadrupled its net income, boosted revenue by 77% and added 41,000 new subscribers in the second quarter. Sound good? Well, it wasn't good enough.

Wall Street's famous whisper numbers were much higher, including a target of 50,000 new subscribers in the quarter, and investors knocked 9% off the stock.

Similarly shares of InterVideo (IVII), a hot, small-cap provider of DVD and video-editing software, were pummeled after the company reported pro forma earnings that merely doubled and revenue that grew by only 70%. The result: a 21% hit.

Even more egregious was the drubbing meted out to eBay(EBAY) in April when it reported that revenue grew by 36% and EPS jumped by 4 cents a share.

"That kind of reaction is just ridiculous," says Jim Fisher, a portfolio manager at Univest Wealth Management & Trust. "Expectations have become a real problem," he says.

To be sure, investors had some legitimate issues with eBay's performance, though the stock made a great recovery in July, and the others.

But concern over the price of oil, a still-tepid information technology spending environment, and the lack of killer products -- especially in software -- means that it may be time to lower expectations a bit.

"I don't see a major catalyst driving technology stocks right now," says Ola Folarin, a software analyst with PNC Advisors, which manages some $22 billion in assets. "I think Q3 will be pretty much an in-line quarter."

Last year, for example, security companies such as Symantec(SYMC) and McAfee(MFE) boomed, as a wave of widely publicized virus and hacker attacks scared businesses and consumers into spending more on antivirus software, firewalls and related products. The threats are still there, of course, but the hysteria has passed.

TechWeek Scorecard
Index	Closing	Change
Nasdaq Composite	2136	-1.0%
Philadelphia Semiconductor	462	-0.2%
Goldman Sachs Software	162	-0.6%
TSC Internet	200	-0.5%