Earnings Warnings From Teradata And IBM: Bad News For Tech Stocks?

Chris Lau, Kapitall: Two tech stocks released earnings warnings for the quarter. Does it signal greater problems for the industry?

US markets rose yet again last week, thanks to the end to the US shutdown and the debt ceiling deal. The S&P 500 is at all-time highs. Yet, not everything is so rosy, especially when you concentrate on the technology sector.

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Teradata (TDC) is one firm that gave an earnings warning. The company provides analytic data solutions, including integrated data warehousing, big data analytics, and business applications. And tech giant  IBM (IBM) reported quarterly results that missed on revenue as well. Do these two reports signal difficult times ahead for others in the tech sector? 

Asia may be the culprit

Teradata predicts revenue in the third quarter to be $665 million, compared to expectations of nearly $700 million. Earnings are going to be as low as $0.69 per share, far lower than the $0.81 per share estimates.

The real problems for the company have been in Asia-Pacific and Japan, where revenue could have declined as much as 21%. Revenue from the Middle East and Africa regions are also declining, though not as much, at an estimated 19%.

IBM can relate  

IBM also reported a decline in revenue in the Asia-Pacific region, where revenue dropped 15%. Throughout the BRIC countries, revenue declines were equally as poor, dropping 15% compared to last year.

Though sales in North America were down only 1%, service backlog overall was flat from the previous quarter. Hardware sales were down sharply by 17% overall. Finally, IBM experienced a 40% decline in hardware sales in China. 

Click on the interactive chart to see stock price data over time. 

Family matters

IBM blamed half of the revenue weakness on the shifting demographics and decelerating growth of emerging markets as a whole. However, execution challenges will invariably hurt a company's bottom line. Therefore a compete recovery may not be expected until the beginning of the first quarter next year at least.

And then, since there is a good chance these tech stocks are suffering from their exposure to emerging markets, the performance of these two companies doesn't necessarily speak for industry trends as a whole. 

Investors should consider weaker results ahead for companies exposed to emerging markets. Reports that the NSA had spying activities in these regions could have been a factor. Its true impact on sales is not fully known, but could linger longer than just the current quarter. This could mean the forward P/E for companies like Teradata and IBM could drop in line with a decline in quarterly sales.

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