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IBM Run May Lack Legs

Analysts don't believe the tech giant's current growth can be sustained in 2008.
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SAN FRANCISCO -- With fears of a recession looming, the indications of a surprisingly upbeat fourth quarter from two tech giants are being taken very cautiously as a bellwether for the tech sector.

The preannouncements from

IBM

(IBM) - Get International Business Machines Corporation Report

and

SAP

(SAP) - Get SAP SE Report

Monday revealed no weakness in the tech sector for the seasonally strong last quarter of calendar 2007.

Analysts on Monday warned that the quarter's reports may not extrapolate to a healthy first half of 2008, as other signs of a recession are starting to show.

But

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IBM's announcement that revenue was over $1 billion more than the Street's expectations jolted the tech sector. The

Nasdaq

was up 0.8% midday, while the iShares S&P GSTI Software Index was up 1%, and the Philadelphia Stock Exchange semiconductor index was up 1.76%.

American Technology Research analyst Shaw Wu attributes $1.1 billion of IBM's revenue for the last quarter to favorable currency exchange rates. The firm does not have IBM as an investment-banking client.

SAP preannounced that it had revenue of 3.25 billion euros, or $4.83 billion for a year-over-year increase of 10%. JMP Securities analyst Pat Walravens had estimated Friday that SAP would have revenue of $4.83 billion and EPS, excluding items, of 87 cents for the quarter. JMP makes a market in SAP.

IBM was up $5.90, or 6%, to $103.57 in recent trading. IBM will disclose its full earnings report Thursday. SAP, which will report earnings on Jan. 30, was up $1.82, or 3.8%, to $49.83.

"Although the 2008 outlook for tech remains uncertain, we view IBM as defensive in the current environment," Goldman Sachs analyst David Bailey wrote in a note to investors Monday. A prolonged slowdown in capital spending on technology remains the biggest risk to the stock. IBM is an investment-banking client of the firm.

"Our early checks indicate strength in global services (57% of revenue), with hardware (20%) and software (19%) coming in essentially in line with expectations," wrote Wu.

Wu stated that he is concerned that IBM's current strength may not be sustainable in 2008.

UBS analyst Ben Reitzes wrote Monday that he continues to be concerned about IBM's hardware and services revenue over the long term, but considers the Armonk, N.Y., company's software business to be its "crown jewel."

Given the revenue and earnings disclosure, Reitzes raised his 2008 earnings estimate some 30 cents, to $8.20 per share. IBM is an investment-banking client of UBS.