The uncertainty created by the terrorist attacks of Sept. 11 has made a murky economic environment even cloudier. While many companies are feeling the impact of the attacks on their bottom lines this earnings season, enterprise-software companies may suffer significantly more than other sectors, according to Melissa Eisenstat, managing director of the software equity research team at CIBC World Markets. She analyzes such marquee names as Microsoft (MSFT) - Get Report, Oracle (ORCL) - Get Report and Computer Associates (CA) - Get Report. Here are her thoughts about current and future trends in the enterprise-software sector and defensive plays in a down market.
Why have enterprise-software companies been particularly affected by the Sept. 11 attacks?
The industry is back-end loaded, especially enterprise software. Corporations make decisions at the end of the quarter in order to squeeze a better deal out of the software company. The attack coming when it did -- in the middle of the last month of the quarter for many software companies -- means that there was some valuable selling time lost.
Which companies do you think will be impacted the most, both in terms of their stock prices and quarterly numbers?
The whole group has taken it on the chin. In terms of companies that will likely see their numbers come down: applications companies. Companies like
are going to continue to see decreases.
, companies that have sales often based on new projects, will be hurt.
Are there any companies that will be particularly impacted because of the attacks?
That's harder to quantify. Blaming the quarterly miss on the attacks is a tough one. They exacerbated the bigger issue.
Which companies do you think may benefit from the attacks?
The places corporations are going to look to invest more are storage and security software. That should bode well for
, perhaps for
Check Point Software
Internet Security Systems
. I'm talking about stock performance over the next six to 12 months.
Many companies have blamed the terrorist attacks for their own shortcomings. Are companies taking accountability for their poor performance prior to the attacks, or are they using the events of Sept. 11 as a smokescreen?
Certain companies that blame the attacks for missing a quarter -- and blame that only -- are probably hiding behind the attacks. Something else might be going on in their businesses.
In the short term, how do you see the stock prices of enterprise software companies moving?
In the short term, the companies that will do better are in storage and security, because all companies will be revisiting their policies for making sure they have their data protected from the threat of losing it as well as people getting into it that shouldn't be.
How about in the longer term?
At some point, there will be some growth again in this economy and that could be the second half of next year -- that's what we're all hoping for. If people begin to take on new projects, applications will do well and that would benefit market leaders like Siebel and
and the CRM
Customer Relations Management market.
There will be upgrades to what are now new products cycles coming in at a tough time. Such as
database business and
XP operating system business. Microsoft is releasing XP on Oct. 25, a tough time to launch a product. At some point, there will be uptake from that product cycle. So, longer term the company will do well. From a defensive standpoint, Microsoft is a good play in the current market environment. The company has a huge revenue base and balance sheet, as well as a lot of cash flow.
What are your firm's positions on Microsoft and Oracle?
We have a buy on Microsoft. It's a company with a very broad product line, so it is dependent not only on enterprise, which is good. People are counting on slow PC growth, so those numbers could go down. But Microsoft also gets about 15% of its revenue from Internet efforts, and the company has tremendous cash flow.
We've got a hold on Oracle because the application business, which the company has been emphasizing, is just not happening. Some customers see the new version of their database as a new project, not just an upgrade, and they are not prepared to take that on. So the likelihood the database could have some growth is unlikely. Having said all that, people still look at the company as a big, reasonably stable company. It has got a great database business, unlikely to be unseated anytime soon, despite threats from
and Microsoft. It has about $5 billion in cash. So it's liquid. It could be seen as a defensive play in the market now.
What are some other important issues about this sector that investors should think about?
One thing you should watch out for is that customer companies will be in the middle of their budgeting process and that might give some indication of where spending is going to go next year. Of course, they went through the budgeting process last fall and in January promptly changed everything. It can change on a dime. If companies give any indication, like, "Hey, we're going to go easy on spending in the first half of the year, but pick that up in the second half," that would be a bullish sign.