A recession may be at hand, but it hasn't pinched the bottom line of technology's giants yet. The news so far from big-cap tech this earnings season has been surprisingly strong. Two of tech's Dow components, Microsoft ( MSFT) and IBM ( IBM), both beat fourth-quarter expectations and raised targets for the current year. But the results have carried little weight on Wall Street, where the reaction to big tech earnings has ranged from indifferent to incredulous.
Rather than finding comfort in the heft and stability of large-cap tech players, investors appear more fixated by the crushing potential of a falling giant, and are scrambling to get out of the way. Shares of the outperformers have gotten little if any lift following their earnings reports. Microsoft finished Friday's session down 4 cents to $32.90, despite the strong quarter. And the slightest hint of weakness has triggered big selloffs, as Intel ( INTC) and Apple ( AAPL) discovered. Both stocks have suffered double-digit percentage drops since reporting earnings. Thrivent Financial fund manager Mike Binger believes the Street is in an all-good-things-must-come-to-an-end mindset. "Whenever you come off a successful year, people tend to think that the forward period may not be as successful as the past year," says Binger. "2007 was a very good year for tech, and because of that strength, the market is kind of sensing a slowdown in the first part of '08. People are sensing more of a reversion to the mean than the actual data has played out yet," he says. Indeed, the PC market finished 2007 on a healthy note, with unit shipments up 15.5% year over year, according to industry research firm IDC. The firm also projected double-digit PC growth in 2008. And despite rumors of rising chip stockpiles that suggests slowing demand for electronic goods, there's been no evidence yet from companies that have reported their earnings. "Besides reporting good numbers, everybody is giving what I would consider some pretty good outlooks when it doesn't behoove them to give a strong outlook unless they felt that way," says Atlantic Trust Stein Roe's Chuck Jones. Of course, Jones notes that the first quarter of the year is a seasonally down period for tech companies, and that's adding an extra layer of angst and uncertainty as investors try to gauge how tech is holding up. This week, EMC ( EMC), Google ( GOOG), Yahoo! ( YHOO) and Amazon ( AMZN) will join the earnings parade and report fourth-quarter results. And off-cycle companies like Dell ( DELL) and Hewlett-Packard ( HPQ) are due to report in February. According to Jones, investors may not get a good read on the prospects of big-cap tech until March or even April, after more companies have weighed in. Wall Street is still waiting to see how the tech sector's various pros and cons play out in the current economic environment. With so much business tied to overseas markets, big tech firms have some degree of insulation from a downturn in the U.S. economy. But that notion assumes a U.S. recession doesn't spill over into emerging markets like India, which provides offshore telephone support services for many U.S. companies. Large-cap tech companies also count banks and other financial services firms among their key customers. As banks write off billions of dollars in worthless mortgage-backed debt, budgets to buy new computers may get squeezed in 2008. Another big wild card is consumer spending on electronics: The Internet is now deeply entwined in everyday life, which could mean that purchases of PCs and other electronic devices don't suffer as much in a bad economy.
Cramer Throws in the Tech Towel
Apple's disappointing iPod sales figures in the fourth quarter don't offer an encouraging sign to that end, but the company also reported strong Mac shipments in the fourth quarter. Pat Adams, chief investment officer of Choice Funds, says he's incredibly bullish about large-cap tech, particularly in light of the Federal Reserve's string of interest rate cuts. "What excites me is that without a question all this stimulus is going to turn the economy domestically. So we have probably a valuation sentiment shift for this year, and then a big earnings kick next year," says Adams. And with the current tech stock valuations looking "obscenely cheap," Adams says he's picking up various names, particularly in the beaten-down semiconductor sector. "I can't tell you what's going to happen over the next 15 minutes, but if you take a time horizon over the next three months to six months to 12 months, there's a lot of upside," he says.