IBM's Not the Only Star in Tech Galaxy

Updates with closing stock price

IBM's(IBM Quote) shares were basking in the glow of the firm's impressive second-quarter results Friday, although analysts are eyeing even greater upside elsewhere in the tech sector.

Shares of the Armonk, N.Y.-based firm, which also raised its 2009 earnings guidance, closed up $4.78, or 4.3%, to $115.42. This outpaced the broader rally in tech stocks that saw the Nasdaq rise 0.1%.

Investors desperate for signs of a tech turnaround are clearly heartened by IBM's earnings beat, which came hot on the heels of strong numbers from Intel(IBM Quote) and bullish comments at Dell's(DELL Quote) annual analyst day.

Boosted by its high-margin software and services businesses, IBM blew through analysts' profit projection despite missing Wall Street's sales estimate.

Goldman Sachs analyst David Bailey expects demand for IT products to improve in late 2009 and early 2010, even in problem areas such as hardware, where IBM took a second-quarter pounding.

The analyst isn't getting carried away, however. "The bottom-line upside from the June quarter and better margins going forward only take our earnings up by 5.4% in 2009," he said. "We continue to expect stocks of companies that have a higher percentage of transactional business, and therefore, more leverage, such as Dell, Seagate(STX Quote), and Arrow(ARW Quote), to outperform."

IBM's crucial services and software businesses, although high-margin, are subscription-based. While this has helped insulate them from the worst of the economic downturn, they may not experience the same rapid growth when the rebound eventually hits, possibly in 2010.

One transactional business that will be closely monitored during the coming months is the PC market, which is a key indicator of the tech sector's strength. Despite an ongoing slump linked to tight consumer spending, there have been recent hints that computer sales are slowly coming back.