Conflicting bullish and bearish signals from recent earnings
reports from technology companies threaten the recent rally in tech
stocks and muddy the outlook for the sector.
Friday, printer maker Xerox Corp. (XRX) and mobile phone giant
Sony Ericsson cut dramatically their first-quarter guidance and
indicated a difficult market this quarter for tech companies.
Contradicting that, though, are recent bullish comments from
software giants Oracle Corp. (ORCL) and Adobe Systems Inc. (ADBE),
which have contributed to a 15% gain this month in the Morgan
Stanley Technology Index.
"You're going to have conflicting signals at this stage because
you are looking at a global economy that is trying to reinflate,"
said Quincy Krosby, chief investment strategist at The
Hartford.
Also contributing to the recent stock rally may be the sense
that the tech sector simply looks safer than other industries.
"What's interesting about tech is that it's both defensive and
offensive," Krosby said. "Each investor has a different way of
looking at tech, but the common denominator of tech is that they
don't hold toxic assets."
Xerox's announcement Friday morning that it expects
first-quarter earnings well below already-downbeat expectations
because of slumping corporate spending added to several reports in
recent weeks that many companies are seeing further deterioration
in the market after a dismal fourth quarter.
Phone maker Sony Ericsson, a joint venture between Sweden's LM
Ericsson Telephone Co. (ERIC) and Japan's Sony Corp. (SNE), also
said Friday it sees a larger-than-expected first-quarter loss.
Xerox supplies IT hardware and printing services to businesses
around the globe, while Sony Ericsson makes mobile phones for
consumers mostly in developed markets, giving the two tech giants
together a wide view of the market.
Anne Mulcahy, Xerox's chief executive, cautioned that industry
prospects didn't look bright in the near term: "Enterprise spending
on technology will continue to decline this year."
Xerox shares fell 15% to $4.56, while shares of Sony and
Ericsson, were down 1.5% and 9.7%, respectively. Meanwhile, shares
in Sony Ericsson rival Nokia Corp. (NOK) dropped 6.6% to $11.24 and
printer maker Lexmark International Inc. (LXK) fell 4.9% to
$16.01.
The news led Shannon Cross of Cross Research to warn about the
revenue expectations of other printer makers and IT hardware
companies, including Hewlett-Packard Co. (HPQ), Dell Inc. (DELL)
and EMC Corp. (EMC). Despite the fresh concerns, the stocks opened
higher Friday before eventually sliding along with the broader
market.
Likewise, the Morgan Stanley Technology Index rose at the open
and has fallen along with the broader market, down 3.4% on the
day.
Even before the warnings Friday, market observers were wondering
about the sustainability of the recent tech rally. For example, on
semiconductor stocks, often considered a leading indicator of
sector trends, analysts are beginning to hint that the stock gains
in the segment since the beginning of this year may retreat.
The Philadelphia Semiconductor Index is up 26% from its bottom
in November. Last week, Wedbush Morgan analyst Patrick Wang told
clients to beware of a "W" shaped recovery as the recent uptick
could falter, and Daniel Berenbaum of Auriga recently told
investors to sell the rally.
However, those opinions were in contrast to recent comments
expressing cautious optimism from tech bellwethers.
Mark Garrett, Adobe Systems' chief financial officer, said
Tuesday that while economic conditions deteriorated during the
first quarter, it saw signs of "stabilization" from early February
onwards. "Since the beginning of February we've seen much more
stability in the business, particularly in North America," Garrett
said.
Elsewhere, the Redwood City, Calif.-based Oracle impressed Wall
Street Wednesday by beating its fiscal third-quarter earnings
expectations and delivering in-line revenues, sending shares up by
as much as 12% the following day.
The divergent reports suggest that while the overall sector is
rallying, much of the strength may be driven by particularly robust
companies, with the larger segment of the sector remaining mostly
rangebound.
For instance, analysts were encouraged by Oracle's performance,
but they cautioned that the company may be an outlier among
technology stocks.
"Oracle has a unique advantage through its (product) reach and
is a very disciplined company, so it's hard to draw too many
conclusions about the rest of the sector," Citigroup analyst Brent
Thill said.
Overall, though, Wall Street may see tech as a safer spot than
others even as demand sags.
"The benefits of cost-cutting could start to show in the
companies' financials," said Trip Chowdhry of Global Equities
Research, "But there is no evidence whatsoever based on our
research that there is any uptick in demand."
- By Jerry A. DiColo; Dow Jones Newswires; 201-938-5670;
jerry.dicolo@dowjones.com
(Jessica Hodgson contributed to this report.)