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Tech's inflation problem
There is none. While that's great news for consumers, it's not for investors.
June 3, 2004: 2:18 PM EDT
By Paul R. La Monica, CNN/Money senior writer

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NEW YORK (CNN/Money) - Higher prices for every day things are on everybody's mind. You see it with stuff like gas, food and movie tickets. Ugh. We need to Whip Inflation Now!

But there's one notable sector where inflation has not popped up: tech.

Think about it. Finding an affordable computer shouldn't be too tough these days since Dell (DELL: Research, Estimates) and Hewlett-Packard (HPQ: Research, Estimates) are locked in a price war for market share. According to the most recent consumer price index figures from the government, the price of PCs and peripheral equipment in April were 15 percent lower than a year ago.

If you need software for that new laptop, that's not going to break the bank. Software and accessories prices are 9 percent lower than last year, according to the April CPI report.

And what about your cell phone bill? It seems like every other day carriers are launching rate plans with more minutes at lower rates. To wit, the cost of wireless telephone services is down 1.6 percent from a year ago.

And admit it, with all the hype about the quality of plasma and LCD screens aren't you thinking of buying a new television? Sure, many digital TVs are still rather expensive but at least prices aren't heading higher. In fact, the price of a new boob tube is 14.8 percent less than in April 2003.

Lower product prices=lower profit margins

Now that's obviously all well and good for the average gadget-loving consumer, but it is not encouraging news for tech companies or tech investors.

Tech, particularly on the consumer side, is an area where downward pricing pressure is a way of life.

What inflation?
With the notable exception of cable, prices are coming down for most tech products and services.
Item% price change from a year ago*
Cable & satellite TV and radio4.8%
Televisions-14.8%
Photographic equipment-10.3%
Wireless telephone services-1.6%
PCs and peripheral equipment-15.0%
Software and accessories-9.2%
Internet services-4.2%
Telephone hardware & other consumer information items-10.9%
* Based on CPI figures from April 2004 and April 2003.
Source: U.S. Department of Labor

"For technology, lack of pricing power is always an ongoing concern," said Barry Ritholtz, market strategist with Maxim Group.

But the current absence of inflation is more problematic than usual since many tech stocks rallied sharply last year and the beginning of this year on the hopes of improving profit margins.

It's going to be tough for them to deliver.

Even Dell, one of the most efficient tech companies, in its most recent quarter reported a sequential dip in margins, which spooked investors.The company blamed increasing component costs, but the underlying problem is the same -- Dell couldn't pass along those costs.

And that makes an investment in Dell, or other hardware companies for that matter, a bit more risky.

"Dell and HP are working on tight margins. Apple is offering more storage space with the iPod even though it didn't lower the price. So it's tough from an investor standpoint," Ritholtz said.

Lower profit margins=lower stock prices

It's a tricky balance for techs. The combination of higher interest rates on the horizon and spiking oil and gas prices could put a dent in consumer tech spending, which actually held up quite well during the economic slowdown.

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This means that companies like HP and Dell or, say, cell phone manufacturers Nokia (NOK: Research, Estimates) and Motorola (MOT: Research, Estimates), probably won't be raising prices any time soon even if they wanted to. As such, the gadget manufacturers may instead seek to put a tighter squeeze on their suppliers, such as chip companies.

And that's an even more worrisome scenario for tech investors. Chip stocks have taken a hit this year, led notably by a more than 12 percent drop in Intel (INTC: Research, Estimates), which is giving a mid-quarter update of its second quarter outlook Thursday after the bell.

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In the case of Intel and other chip stocks, investors seem to be concerned that the semiconductor cycle is closer to its peak than its trough.

And if Intel and its competitors find themselves in the position where their customers start to demand lower prices for components, then that could further fuel a bearish case for chips and tech stocks in general since margins would likely take a hit down the entire tech food chain.

Once again, that's great news if you're in the market for a new camera phone, Wi-Fi notebook or plasma TV. But it's all the more reason to not rush into stocks of brand name gadget makers like Nokia, Hewlett-Packard and Sony or big time chip suppliers like Intel and Texas Instruments.


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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.