NEW YORK (CNN/Money) – Are big corporations finally opening up their wallets for some high-tech purchases?
The market seemed to be betting Thursday that such was the case. The Nasdaq shot up 2.7 percent mainly due to some encouraging news from enterprise software developer SAP and networking equipment firm Foundry Networks.
SAP announced that fourth-quarter license software sales were better than expected. And Foundry Networks, which competes with Cisco Systems, boosted its revenue and earnings guidance for the fourth quarter, citing strong demand for routers and switches. In addition, Foundry said that its book to bill ratio was greater than 1. That means orders are outpacing shipments.
A trend or one-off events?
So are these isolated events are the start of something big? One money manager says there is no doubt that spending on tech, and hence tech company earnings, should be better. But investors still need to be cautious.
"Companies will have to start spending on capital expenditures again if they want to remain competitive. The question is how much," said Adam Adelman, a technology analyst for Philippe Investment Management, a New York-based money management firm. "I don't think the SAP and Foundry news is necessarily an indication of a strong recovery."
And even though earnings expectations for the fourth quarter of 2002 seem to be fairly reasonable, the full-year estimates for 2003 might need to come down. According to Baseline, a financial information database, analysts are predicting earnings for the S&P Information Technology index to increase 46 percent from last year.
Mark Verbeck, a software analyst with boutique research firm ThinkEquity Partners, says that even though there may be up pent-up demand for technology products, he is worried that companies may buy all they need in the first half of the year but wind up doing little spending in the second half. So good news in the first and second quarters could give investors false hope of a permanent recovery.
"For the most part, chief information officers I talk to don't have bigger budgets than last year," Verbeck said. Verbeck does not owns shares of the companies he follows and ThinkEquity has not performed investment banking services for any of them.
Verbeck says valuations are also starting to become a bit of a concern. The Nasdaq, after all, is up nearly 30 percent from its Oct. 9 low. And according to Baseline, the S&P Information Technology index is trading at 31 times 2003 earnings estimates. Not exactly cheap.
Shouldn't get any worse but ...
To be sure, few are expecting demand to get a lot worse for technology, although tensions in Iraq and North Korea are the biggest wild card, says Warren Tennant, senior analyst for the AIM Global Science & Technology and AIM New Technology funds.
Tenant notes that other areas of technology are starting to show some improving signs as well. Storage companies EMC and McData recently raised fourth quarter guidance for example.
But Jay Wong, co-manager of the Payden U.S. Growth Leaders and Payden Small Cap Leaders funds, says that he'd be more optimistic about the sector's outlook if the tech behemoths, companies like Microsoft, Cisco, Intel and Oracle were giving bullish forecasts for 2003 and not just raise guidance for the quarter that's already over.
"Across the board most companies, have been reluctant to guide upward going forwards," said Wong. "I wouldn't be aggressively adding tech at these levels. The sector is certainly not out of the woods yet."
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