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IBM's Not the Only Star in Tech Galaxy

IBM's results may be grabbing the headlines, but don't forget the rest of the tech sector.

Updates with closing stock price


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shares were basking in the glow of the firm's impressive

second-quarter results

Friday, although analysts are eyeing even greater upside elsewhere in the tech sector.

Shares of the Armonk, N.Y.-based firm, which also raised its 2009 earnings guidance, closed up $4.78, or 4.3%, to $115.42. This outpaced the broader rally in tech stocks that saw the Nasdaq rise 0.1%.

Investors desperate for signs of a

tech turnaround

are clearly heartened by IBM's earnings beat, which came hot on the heels of

strong numbers



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bullish comments

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annual analyst day.

Boosted by its high-margin software and services businesses, IBM blew through analysts' profit projection despite missing Wall Street's sales estimate.

Goldman Sachs analyst David Bailey expects demand for IT products to improve in late 2009 and early 2010, even in problem areas such as hardware, where IBM took a second-quarter pounding.

The analyst isn't getting carried away, however. "The bottom-line upside from the June quarter and better margins going forward only take our earnings up by 5.4% in 2009," he said. "We continue to expect stocks of companies that have a higher percentage of transactional business, and therefore, more leverage, such as Dell,


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, and


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, to outperform."

IBM's crucial


and software businesses, although high-margin, are subscription-based. While this has helped insulate them from the worst of the economic downturn, they may not experience the same rapid growth when the rebound eventually hits, possibly in



One transactional business that will be closely monitored during the coming months is the PC market, which is a key indicator of the tech sector's strength. Despite an ongoing


linked to tight consumer spending, there have been recent hints that computer sales are slowly coming back.

Earlier this week, for example, technology research firm IDC reported that global PC shipments came in better than expected during the second quarter. Worldwide PC shipments slipped just 3.1% compared to the prior year's quarter, it said, an improvement over the expected decline of 6.3%. While this is a far cry from the PC boom of the nineties, it should offer some comfort to investors after a turbulent few months.


This bodes well for Dell, Seagate,


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in the seasonally stronger second half of the year," wrote Goldman Sachs' David Bailey. "We also expect fundamentals in component distributors to pick up as we move through the summer, benefitting Arrow and


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Brian Marshall, an analyst at Broadpoint AmTech, also feels that other companies may offer greater upside to investors than Big Blue.

"Without question, IBM continues to 'separate the wheat from the chaff' and is distinguishing itself as one of the best-run companies in the world," he wrote, in a note released Friday. "However, we currently prefer long exposure to IBM's business partners (


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) due to higher earnings leverage and superior risk/reward profiles."

Like Bailey, Marshall is also exercising a degree of caution about IBM, and maintained his "neutral" rating on the tech giant's shares.

"We would like to see the 'whites of the eyes of the recovery' prior to getting constructive on IBM shares and are monitoring potential negative pricing dynamics from increased competition (H-P and


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)," he wrote.