SAN FRANCISCO (www.redherring.com) - After enduring a devastating two-month sell-off of technology stocks, investors got slimed Wednesday by IBM's sluggish revenue growth. And given IBM's considerable girth, it's not likely the last true technology bellwether is going to kick it into high gear any time soon.
Big Blue managed to meet earnings estimates, posting earnings of $1.08 per share, more or less in line with analyst expectations. But the company posted an anemic 3 percent revenue gain over the same quarter last year, to $21.8 billion from $21.1 billion.
 And while it was the first quarter of revenue growth IBM has eked out this year, it was half of what analysts were expecting. There was precious little good news for IBM to key on, and with investors feeling as bearish as ever, that was all it took to send the markets spiraling downward.
Wall Street stared into the abyss for the first hour of trading Wednesday as IBM sucked the life out of the Dow Jones and the Nasdaq. The Nasdaq at one point had dipped as many as 188 points to 3,026 before staging a late rally to finish the day at 3,171.56, while the Dow fell as much as 438 points before rallying to close 114.69 points lower at 9,975.02.
It was the first time the Dow had fallen below 10,000 since March, and Dow component IBM was chiefly responsible for the ugliness, losing almost 16 percent of its market value to close the day at $95.43.
Don't call it a comeback
IBM was supposed to be a second-half story this year, shaking off the post-Y2K doldrums to put up some solid numbers late in the year. However, the snail's pace at which Big Blue was able to grow revenue, and the new earnings guidance for the fourth quarter, took analysts by surprise and touched off a flurry of downgrades and earnings estimate revisions from the likes of Deutsche Banc Alex. Brown, Prudential Securities, and Goldman Sachs.
IBM blamed its performance on an internal supply shortage, a botched transition between high-end server products, and an unexpected slowdown in software sales.
The software division posted an embarrassing 3 percent decline in revenue. In one of the few bright spots, IBM's beleaguered PC division actually managed to turn a profit of $65 million, after posting a loss of $1 billion in 1998. Needless to say, investors could care less about the PC division, particularly when the company is growing revenue in North America at a microscopic 1 percent year-over-year.
"This is a big company with a lot of moving parts, and they just have to get them all going in the same direction," says Jay Stevens, analyst with the Buckingham Research Group. "It is likely that they will turn up the revenue growth because the cost control is superb, and the product line grows every day. But their revenue growth in the Americas was unacceptable, and an improvement in domestic sales has to happen."
IBM did do a phenomenal job of driving costs out of its businesses and squeezing profit out of its growth-challenged top line. Despite all of the bad news around revenue, Big Blue increased earnings per share by 20 percent year-over-year. But without the top-line growth analysts were hoping for, IBM's stock got hammered, dragging down more than a few tech stocks with it.
The last tech bellwether
Experts were hoping that IBM's broad portfolio of products and services would insulate it somewhat from the problems that more specialized vendors, like Intel and Dell Computer, were having. But as it turns out, IBM is finding that it has as slim a margin for error in today's market as everyone else. And given IBM's breadth of technology offerings and geographical diversity, its bad news is more indicative of the overall state of the tech market than any other company.
Some things in IBM's balance sheet were not surprising -- like a pullback in Europe or more opportunity for growth in Asia -- but in looking at the product breakdown, some alarming trends emerge. IBM's hardware revenue grew only 4 percent, while software declined 3 percent. In fact, the only area of its business that grew faster than 4 percent was IBM's global financing division, which had an 11 percent increase.
That's what makes the IBM news so depressing. As long as the tech sector continues to slump, Big Blue will not be able to grow revenue nearly as fast as it had hoped. And the company won't be able to jimmy up its numbers to make earnings forever, so disappointment on the bottom line will eventually follow as well. All of which makes IBM a dubious stock pick, and the whole tech sector a minefield in the immediate short term.
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