Soft Parade: Software Makers Rally on SAP, IBM News

But some analysts caution the sector's fundamentals haven't changed.
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Software shares surged Thursday after a strong earnings report from German behemoth

SAP

(SAP) - Get Report

and a rising tide in the technology sector spurred by

IBM

(IBM) - Get Report

.

But some market watchers caution that this relief rally comes ahead of a slew of earnings reports and doesn't indicate a reversal of fortunes for the beleaguered sector. "The market wants to rally," said Erik Gustafson, a senior portfolio manager at Stein Roe. "Remember the day before we got lousy news from

Intel

(INTC) - Get Report

. There certainly has been no sea change in techovernight or in the technology fundamentals overnight."

SAP's ADRs paced the big gainers, rising $3.36, or25%, to $16.76 in afternoon trading. Other strong performersincluded

PeopleSoft

(PSFT)

, whichsurged $1.66, or 11%, to $16.51;

BEA Systems

, up 64 cents, or 10%, to $6.70; and

Veritas

(VRTS) - Get Report

, up$1.46, or 10%, to $16.

Software volume leadersincluded

Microsoft

(MSFT) - Get Report

, whichclimbed $1.01, or 2%, to $51.42 and

Oracle

(ORCL) - Get Report

, which rose 64 cents, or 6.9%, to $9.96in recent trading. The Goldman Sachs software indexclimbed 5.1%, while the

Nasdaq Composite

Index rose 3.5%.

"I think SAP was definitely heartening forpeople. They delivered great results," said ThinkEquity analyst Mark Verbeck. "Everyone was so negative, so concerned." Indeed, before Thursday'srally, shares of SAP were down 59% for 2002. The software maker reportedearnings before markets opened that beat estimates, although it withdrew revenue guidance for the year, as expected.

Verbeck noted that SAP's numbers in both Europe and the U.S. were "decent." "That, combined with general strength in the market as a whole, has gone a long ways for software," said Verbeck, who has an outperform rating on SAP. His firm hasn't done any banking with the company.

Meanwhile, BEA's boost may have been driven by the results from competitor IBM, suggested Sanford C. Bernstein analyst Charlie Di Bona. "One school of thought is that IBM's performance in Websphere is apositive indication for leading application servervendors. That of course includes BEA," he said. "Somepeople may be taking the IBM's numbers as a catalyst."Di Bona has an outperform rating on BEA and his firm doesn't doinvestment banking business.

But if some investors are, in fact, buyingsoftware stocks in light of SAP's news, they may bemaking a risky bet, analysts cautioned. That may beparticularly true for some names that are scheduled toreport earnings after markets close today.

"SAP on the revenue line looked relativelyimpressive on the license portion but there's nothinggangbusters to tell me it's a trend for the overallsoftware group," said Josh Freedman, an equity analystwho covers technology, including software, for BergerFinancial Group.

Rather, analysts said SAP's results were morecompany-specific, with SAP able to draw on a largeinstalled base of customers and its margin improvementdriven in part by cost controls and better executionin the United States.

"I think you have a mixed bag

of softwareearnings reports this afternoon," Freedman said. Most at risk of disappointing, he said, is

SiebelSystems

(SEBL)

, which surprisedWall Street last quarter with a stunning 41% declinein license revenue. Siebel did not preannounce thoseresults, and Freedman said that may happen again,given that the company's guidance for license revenue-- a range of $145 million to $180 million -- was sowide. Freedman's firm doesn't own Siebel stock.

Shares of Siebel were up 53 cents, or 7.9%, at$7.28 in recent trading.

Analysts say that buying shares ofMicrosoft, as the world's largest software companyprepares to report results later today, is a safe bet.Gustafson, whose firm owns shares of Microsoft,suggested the company has signaled it will makenumbers, judging by the numerous recent analystreports that have suggested so.

Microsoft is not necessarily a good indicator ofhow other software vendors are doing because it is solarge, but its report tonight is certain to drive themarket tomorrow, analysts said. "In this type ofenvironment, Microsoft can be the speedboat that pullseverything along in its wake," Gustafson said. So holdon for another wild ride tomorrow.