| Commentary | |
The trouble with tech
AMD's job cuts are the latest sign that the weak economy is wreaking havoc on the technology sector. But there are signs of hope for longer-term investors.
NEW YORK (CNNMoney.com) -- The turmoil on Wall Street gets all the attention these days. But guess what? Silicon Valley isn't faring that much better.
AMD warned Monday evening that its first-quarter sales will be lower than analysts' forecasts. The chipmaker blamed "lower than expected sales across all business segments." Making matters worse, AMD (AMD, Fortune 500) said it would also cut 10% of its workforce.
The job cuts at AMD follow news last week that personal computer maker and AMD customer Dell (DELL, Fortune 500) would be shutting a desktop manufacturing plant in Austin. Motorola (MOT, Fortune 500) also recently announced job cuts, as did Yahoo (YHOO, Fortune 500).
Clearly, the weak economy is beginning to take its toll on the tech sector. As such, tech stocks are among the weakest market performers this year. The S&P Technology sector has plunged 12.7% so far in 2008, compared to a 6.5% drop for the broader S&P 500.
There are a couple of issues at play here. For one, being second-best in the tech sector is often not good enough in the eyes of investors. Dell is facing a tough challenge from HP (HPQ, Fortune 500). Motorola is getting hurt by Nokia (NOK).
But industry leaders are having a tough time in this environment as well.
AMD's top rival, Intel (INTC, Fortune 500), was forced to cut more than 10,000 jobs last year and warned a few months ago that its first quarter sales would miss Wall Street's targets. Even the mighty Google (GOOG, Fortune 500) has had to lay off some of the workers at its recently acquired DoubleClick unit.
And despite this gloomy news, Arnie Berman, the chief technology strategist with Cowen & Co., said that he's concerned that sales and profit forecasts for technology companies this year may still be way too high.
"Estimates are not even close to being low enough," he said. "There is little out there about revenue growth or margin expectations that are consistent with the possibility of a recession. And the question now is not 'Will there be a recession?' but 'How deep?'"
To be sure, there are some bright spots in tech. BlackBerry maker Research in Motion (RIMM) reported last week that sales and profits in its most recent quarter more than doubled. The company also raised its sales and profit targets for this quarter.
And online retail sales are expected to increase 17% this year despite sluggish consumer spending, according to a report released Monday by Forrester Research and e-commerce trade group Shop.org. Along those lines, Amazon.com (AMZN, Fortune 500) announced today that it was looking to hire more than 500 full-time workers for three fulfillment centers in Kentucky.
They may be the exceptions. Berman expects a tough year for tech stocks. However, he thinks that 2008 looks a lot like 1994 for the sector ... which could be good news for longer-term investors.
In 1994, the tech-heavy Nasdaq fell 3% on economic concerns but surged 40% in 1995 following strong demand for personal computers, cell phones and software.
This time around, Berman believes that healthy demand for Internet video services and mobile broadband technology will drive a tech bounceback in the coming years.
He said networking company Cisco Systems (CSCO, Fortune 500) and chipset manufacturer Qualcomm (QCOM, Fortune 500) are two companies best positioned to take advantage of these trends. But it's probably a little early to get too excited.
"We're about halfway done on the estimate revisions," he said. "But there are some other shoes to drop. You can't make a huge bullish tech call yet without making a huge bullish market call. And the worry with Cisco and other companies is about current growth and the current business tone."
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