NEW YORK (CNN/Money) -
Analysts so far seem to have gotten it right for the first quarter...but earnings estimates for the whole year might still need to come down.
According to First Call, Wall Street analysts are predicting earnings growth of 15 percent for technology companies in the first quarter. And with only March to go, that healthy growth seems -- dare we say it -- reasonable.
But even though many tech companies have gone out of their way to stress that they are not seeing any imminent pickup in demand, analysts are still forecasting earnings growth of 30 percent for the year.
Adam Adelman, senior analyst with money management firm Philippe Investment Management, says those estimates are probably too high. He doesn't see things getting worse from here but does not believe that the economy will improve so much in the second half to spur a big wave of spending.
As a result, he thinks tech earnings growth projections will probably be lowered -- and that means that tech stocks have more downside.
"I'm not sure what people are basing the hopes of that much of a recovery in the second half on," Adelman says. "There is no reason to be more optimistic."
Chips and software may disappoint
Looking specifically at the first quarter, Wall Street has done a good job of lowering their expectations for the near-term and if anything might have gotten a tad conservative with their estimates. That was the case in the fourth quarter of 2002.
Between the start of the fourth quarter and the end of last year, analysts cut their estimates for tech sector earnings growth from 32 percent to 15 percent. As it turns out, earnings wound up increasing by about 22 percent.
|Sector†||Est. EPS Growth†|
|Hardware and Equipment†||33%†|
And so far, there have not been too many earnings warnings from major tech companies. In fact, telecom equipment company Corning (GLW: Research, Estimates), wireless chipset maker Qualcomm (QCOM: Research, Estimates) and software developers Intuit (INTU: Research, Estimates) and SAP (SAP: Research, Estimates) have all said that their first quarter results would be better than expected.
That said, tech investors still haven't heard from all precincts, and with two months under their belts, technology companies will be taking a close look at their numbers during the first two weeks of March in order to figure out whether they'll need to issue an earnings warning. (That's right, it's preannouncement season!)
So which companies might disappoint? Berman says that software companies are at most risk of missing their already weak numbers. According to First Call, analysts are expecting earnings for the software sector to be unchanged from last year.
Predicting earnings growth for the software sector is notoriously difficult since a lot of contracts tend to get signed during the last few weeks of the quarter. Oracle has already hinted that its revenue growth in its fiscal third quarter, which ends on Feb. 28, may not be as high as originally hoped.
Semiconductor companies might also warn, according to Adelman, since there is still a lot of excess capacity in the industry. Chip stock earnings estimates have already come down drastically. According to First Call, analysts were expecting earnings growth of 1 percent at the beginning of the year. Now analysts are projecting a 25 percent decline.
As for companies that could surprise on the upside, both Berman and Adelman say that companies like EMC (EMC: Research, Estimates) and Network Appliance (NTAP: Research, Estimates) might do better than expected as companies begin to realize that data storage is an area that they need to keep investing in.
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It does appear that companies are slowly starting to spend on tech again. But Berman says that big businesses he talks to are basically spending on simple tech needs, like new computers and more storage, not grand new projects.
"It's infrastructure more than anything else," says Berman. "There is a desire to safeguard productivity gains that tech has brought out in the past decade."