Associated Press
08.13.2004

Just when many investors were about to yank technology stocks out of their portfolio before share prices drift any lower, along came Dell.

The mood on Wall Street turned against tech stocks this week after a spate of warnings from three top names - Cisco Systems Inc., National Semiconductor Inc., and Hewlett Packard Co. All three said corporate spending has begun to wither and inventories are on the rise. That was enough to push many in the sector toward share levels not seen in a year.

Enter Dell Inc., the world's largest PC maker, which reported Thursday that demand for its products continues to surge. Dell met analyst expectations for the second quarter, and gave a clear message to the markets that investors might be overreacting in pulling out of the technology sector.

"To paint the entire industry with one brush would be ill-advised for investors," said Dell chief executive Kevin Rollins during a conference call with analysts. "The market should not value every technology, not value every company, should not value the whole sector the same all the time."

Dell shares responded, rising $1.56 to $34.68 in midday trading Friday on the Nasdaq. They also provided a lift to a sector that has seen shares hovering near 52-week lows. Intel Corp. rose 1 cent at $21.25, Cisco was up 21 cents at $18, and Microsoft Corp. increased 24 cents at $27.12. Shares of Hewlett Packard, meanwhile, fell 42 cents at $16.53.

Plaguing shares of tech companies has been concerns they would not live up to expectations of sales growth in the traditionally sluggish summer months. Around this time last year, tech stocks bucked that trend as corporations began pumping more and more money into information technology spending, pushing sectors such as the semiconductors and hardware to near-record sales levels.

But things took a turn since the market peak for techs in February. The Nasdaq began a six month slide and is now down 11 percent on the year - more than twice the year-to-date decline in the Dow Jones Industrial Average.

"Stocks have been trading on expectations, and there was an expectation that we were going to grow right through seasonality this year like we did last year," said David Grossman, a senior analyst with Thomas Weisel Partners in San Francisco. "There's no evidence yet that we're going back into a negative growth environment ... we're coming off a robust period of growth and everybody is guessing what the tech sector will be like in a more normal economic growth period."

Dell, which overtook Hewlett Packard as the largest PC maker last year, hit its forecast for second-quarter earnings of $799 million, or 31 cents per share, up from last year's profit of $621 million, or 24 cents per share. Sales increased to $11.7 billion from $9.8 billion.

Rival Hewlett Packard posted earnings of 19 cents, up from 10 cents last year, with sales up to $18.9 billion from $17.3 billion. Excluding one-time items, HP's earnings were 24 cents per share - below the 31 cents analysts polled by Thomson First Call had expected.

Rollins remains bullish on the business. His counterpart at Hewlett Packard, Carly Fiorina, blamed a downturn in tech spending and trouble in its server and storage group. Her concerns about a buildup of inventories - meaning companies aren't making much in the way of new purchases - was echoed in sales warnings from Cisco and National Semi.

So, who do you believe in determining what direction tech stocks are going to move? It might be a bit of both.

Investors and analysts suggest that while that corporate spending still shows growth, technology stocks are becoming more cyclical in nature. Recovery from the tech bubble's burst might be slower than expected while valuations of these companies are also subject to correction.

"You can talk valuation of stocks until your blue in the face, but you've got nothing if there is no momentum in the sector no matter how cheap the shares are," said Doug Sandler, chief equity strategist for Wachovia Securities. "We've been watching tech during a big growth period, but now they are getting to the point where they'll have to behave like a cyclical."

This has driven many well-known tech companies toward lows this year. Many of them - such as Intel, Oracle Inc., Seibel Systems Inc., BEA Systems Inc., and RF Microdevices Inc. - were among the companies that aided in a run-up of tech stocks through most of 2003.

Sandler said many investors are taking a hard look at stock prices and have realized they have outpaced potential earnings growth. Analysts said most people aren't even looking at third-quarter guidance numbers but instead are more focused on the December quarter.

The fourth quarter for many high technology companies traditionally ranks among the biggest, and could give a glimpse of what capital spending will be like for 2005. Neither Hewlett Packard, Cisco or National Semi have yet to announce their second-half outlooks.

Sandler of Wachovia Securities said technology stocks would likely continue to be pressured until investors start to see some indications about how that quarter will turn out. Further, he also pointed toward data such as employment figures which could give some insight into how much money companies might spend in the coming quarters on new hardware and software.

Investors are also expected to get a better gauge on technology stocks once executives at Microsoft Corp. and other companies brief analysts about their respective quarters. Strong expectations could have a trickle down effect to the smaller companies they do business with - and might stem volatility.

For Internet-related stocks, the public flotation of Google Inc. might renew enthusiasm for players in that sector. Rivals such as Yahoo have seen its share price ebb in the past few months A good start for Google might also hoist others from Ebay Corp. right through to IAC/InterActiveCorp.

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