Tech's 2011 Spending Winners

NEW YORK ( TheStreet) -- IBM's ( IBM) stellar fourth-quarter results and strong numbers from Intel ( INTC) have raised expectations that 2011 will be a good year for technology stocks such as VMware ( VMW), Citrix ( CTXS) and Qualcomm ( QCOM), set against the backdrop of an improving economy.

With consumer confidence rising, jobless claims falling and analysts raising their U.S. GDP estimates, there are signs that the American economy is slowly getting back onto its feet, albeit somewhat groggily.

"IT spending correlates most directly with overall economic indicators such as GDP and consumer confidence," Roger Kay, an analyst at Endpoint Technologies, told TheStreet. "Both of those indicators are mildly positive at this point -- nobody is celebrating with champagne, but things are moving along."

Brian Marshall, an analyst at Gleacher & Company, adds that IBM's results could pave the way for other tech stocks. "IBM usually grows its revenue by about 16% year-over-year in the December quarter and this year it was a robust 20%," he explained in an email, adding that the data center is particularly hot. "The biggest growth cycles include virtualization and adoption of NAND Flash in the enterprise."

This spells good news for companies such as virtualization market leader VMware, which blew past analysts' fourth-quarter estimates on Monday, as well as storage maker SanDisk, which posts its own fourth-quarter numbers on Thursday.

VMware's stock has risen more than 110% over the last 12 months, buoyed by strong demand for its products, which looks set to continue. In a statement released after market close, the company noted a fourth-quarter spending uptick and offered robust guidance, albeit with a flat operating margin.

Tech research firm Gartner recently raised its 2011 global IT spending forecast to 5.1% from its previous prediction of 3.5% growth, citing a healthier economic environment. Rival research shop Forrester is even more bullish on the prospects for IT spending, predicting a 7.1% rise in global IT purchases, boosted by accelerating demand for software. Further evidence of the tech sector's health came on Monday, when data from consulting firm Challenger, Gray & Christmas revealed that IT job cuts plummeted in 2010, with 73% fewer redundancies than 2009.

"We're seeing good trends in the corporate data center and hearing about demand for servers, storage and traditional networking equipment," added Jayson Noland, an analyst at Robert W. Baird. "I would expect that could boost EMC ( EMC) and NetApp ( NTAP) -- the hardware component of Hewlett-Packard ( HPQ) also -- looks like it is very healthy."

The analyst firm thinks that the strength in financial services noted by IBM could also benefit software companies such as desktop virtualization specialist Citrix and Web-based software provider ( CRM), while Big Blue's middleware sales are a positive for rival Red Hat ( RHT) and its JBoss offering.

Citrix, which was one of the best-performing S&P 500 stocks in 2010, recently told TheStreet that corporate America's growing use of tablets will also bolster the company's software business. Citrix, according to CEO Mark Templeton, has developed an application that can be used to touch-enable enterprise apps on Apple's ( AAPL) iPad and the slew of Android tablets flooding the market. "It enables a whole range of possibilities," he said. "If you're a doctor and you want to take a medical record right to the patient on an iPad or other device, you can."

The Fort Lauderdale, Fla.-based company is also working with Cisco to provide services on the networking giant's forthcoming Cius business tablet. Investors will get more information on Citrix's tablet efforts when the firm reports its fourth-quarter results after market close on Wednesday.

IBM CFO Mark Loughridge also noted that enterprises are reopening their wallets during the fourth-quarter conference call, although the big question for tech investors is: How long will this last?

"We're probably middle innings," said Robert W. Baird's Noland. "Some of it is pent-up demand coming out of the recession and some of it is solid fundamental growth , but we see solid hardware trends carrying through 2011."

Gleacher & Company's Marshall cites a similar time frame, explaining that the sector is midway through a three-year spending uptick. "Perhaps we see a bump in the road in the next six quarters or so, but the long-term trends over the next decade remain robust," he told TheStreet. "Cloud in the 2010s will be like the client/server architecture was in the nineties -- super strong."

The push to build infrastructure for delivering services via the Internet, dubbed the cloud, is already seen as a boon for networking stocks like Cisco ( CSCO) , Juniper ( JNPR) and Riverbed ( RVBD). IBM and HP are also aggressively chasing this market, which is expected to prompt a massive surge in demand for hardware.

"People will do private clouds," explained Endpoint Technologies' Kay, citing the clouds that are build within a company's data centers to support its own users . "Enterprises are building their own cloud infrastructure and to do that they need server, storage and networking infrastructure."

The analyst, however, thinks that investors should be careful what companies they use as economic indicators in 2011.

"Intel has been a pretty good bellwether in the past, but as the market shifts to greater mobility, Intel has missed the boat, at least for the time being," he told TheStreet. "On the mobility side, the bigger indicators are Qualcomm ( QCOM), Nvidia ( NVDA) and Texas Instruments ( TXN) -- I would expect Qualcomm to do quite well."

Qualcomm, which reports its first-quarter results on Wednesday, is expected to receive a boost from the new Verizon ( VZ) iPhone, and CEO Paul Jacobs recently told TheStreet that macro-economic conditions are improving, driven by Asia and emerging markets.

Texas Instruments, which reported its fourth-quarter results Monday after market close, came in a penny ahead of Wall Street's profit view but posted a second sequential decline in orders. At quarter's end, orders stood at $3.13 billion, down 4% from last year.

The company's CEO, however, remains bullish about demand for his wireless chips. "As we enter 2011, Analog and Embedded Processing technologies are becoming even more pervasive in the electronics of everyday life," he said. "With our focused R&D and expanded manufacturing capacity, we're ready to deliver when and where our customers want."

"If the economy is going OK, people tend to buy IT," said Endpoint Technologies' Kay. "As long as the economy doesn't tank -- spending should go along steadily."

--Written by James Rogers in New York.

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