TechWeek: Consumer Helps Out Here, Too

The earnings onslaught shows demand is alive and well.
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Forget the quibbling over guidance and margins as reported by Microsoft (MSFT) - Get Report, Intel (INTC) - Get Report, Google (GOOG) - Get Report. Tech stocks are on a roll, and barring a severe spike in oil prices, an interest rate surprise or some other macro-level shocker, are likely to finish the year in high style.

One big reason: Consumers are spending money; lots of it. Consider hard-drive maker

Seagate

(STX) - Get Report

, which rose from the near-dead to become the most attractive company in its set. Sales of hard drives for use in consumer electronics items like

Apple's

(AAPL) - Get Report

iPod and other handhelds have been so strong that Seagate and its competitors won't be able to keep up with demand in the third quarter.

Similarly, Intel CFO Andy Bryant said during his company's conference call, "I've got my factories running full-out right now." Intel churned out a record number of CPUs in the quarter and boosted capital expenditure targets, a critical indicator of future business prospects, to $5.9 billion from a previous range of $5.4 billion to $5.8 billion.

"Almost nobody who's reported suggested that demand is a problem," said Tony Ursillo, an analyst with Loomis & Sayles. And what a contrast that is with the constant fretting over spending that marked the earlier part of the year.

The tech rally started in late spring when the

Nasdaq

was at 1904.18 and continued into this week, with the Nasdaq hitting a four-year high of 2188.57. Can it continue? "It can," says Peter Cardillo, chief market analyst at SW Bach. "It

the Nasdaq won't go straight to the moon and it will have pullbacks. But the pullbacks will be shallow," he said. But should the macro environment (think oil prices) change in a way that significantly affects consumer spending, all bets are off, he quickly added.

Although less than half of the 79 technology companies represented in the

S&P 500

have reported, it's not too early to say the second quarter was very solid. So far, 23 of those companies have beaten earnings expectations, eight matched and two fell short, according to Thomson First Call analyst John Butters. Moreover, the firms that beat forecasts did so by 6%, the best performance by any group in the S&P with the exception of telecom, he added.

How quickly are bottom-line results growing in the tech universe? About 14%, including actual quarterly results and estimates for those yet to report. And remember: the same companies grew by 66% in the second quarter of 2004, making for a very tough comparison.

Still, the long spring rally "spoiled some investors," says Daniel Morgan, a portfolio manager with Synovus Investment Advisers. "They just wanted more."

Yahoo!, for example, grew revenue by 44% in the second quarter, a level that few large companies can match, and delivered decent earnings. But it was rewarded with a sharp selloff, as investors were disappointed when the company didn't hit inflated "whisper numbers."

Also, there had been mounting interest among momentum investors in Internet search stocks like Yahoo! and Google, as both had been soundly beating Wall Street's numbers for the previous two quarters. So Yahoo!'s in-line report may be

chasing some of the momentum money out of the stock.

Meanwhile, in a classic case of bad news/good news, companies with substantial export businesses have lost the crutch of the weakening dollar. But because they are finally admitting that currency counts, "the quality of earnings is getting much better," said Richard Williams, of Garban Institutional Equities.

The cheaper dollar made it easier to sell abroad, and companies that didn't have many expenses payable in dollars came out ahead by 2% to 3% or more on their bottom lines.

Williams, who had been something of a lone voice on the currency question, said "the game is up. The Street is going to factor that in from now on." Case in point:

EMC

(EMC)

. The company's third-quarter guidance was light, but because the storage giant 'fessed up and said it was due to currency fluctuations, Wall Street gave the company a pass.

Also worth noting this week:

Because

IBM's

(IBM) - Get Report

report was more than a week ago, it's easy to forget what a remarkable turnaround Big Blue accomplished. Most significant was the recovery in the services business. Revenue for the division, which accounts for half of IBM's sales, rose 6.3% to $12 billion in the second quarter. The services business also recorded contracts worth $14.6 billion during the quarter -- above most analysts' expectations.

Companies that bank on the consumer market risk a hit to margins, of course. In the case of Intel, the hit was small, and largely due to a shift to cheaper chips used in consumer notebooks. But cutthroat competition wrecked pricing in the mobile-phone market. As a result,

Nokia

(NOK) - Get Report

was slammed by investors after it missed its earnings target by 3 cents, despite a 25% sales gain.

Microsoft didn't say anything that will help it break out of its seemingly frozen trading range in the near term. And it won't change until the next generation of Windows and Office prove that they, like Windows 95, are money magnets -- or not.

Some analysts, like Ursillo, warned about sharp swings in the market. "I was struck this week by how violently investors reacted to good news and bad news," he said, adding that he wasn't ready to say if the year would indeed end bullishly.

Ursillo is right to be cautious, of course, but for now, as the Magic 8-Ball used to say, "Signs Point to Yes."