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Three Reasons Technology Companies Will Continue to Coast Through 2010

Companies / Tech Stocks Jul 09, 2010 - 06:51 AM GMT

By: Money_Morning


Diamond Rated - Best Financial Markets Analysis ArticleKerri Shannon writes: Technology companies had a blowout first half marked by strong earnings and successful product rollouts. But the second half of 2010 could be even bigger, because a flurry of merger and acquisition activity, corporate IT splurges, and high consumer demand - particularly in emerging markets - have set the stage for a serious haul.

"We're going to have much stronger results in the second half [of 2010] than anyone's expecting," Mark Stahlman, a partner at research firm TMT Strategies, told CNBC.

Business was booming back in 2007, but technology companies froze when businesses and consumers were engulfed by the financial crisis. Global tech spending dropped 4.2% in 2009, but is already bouncing back in 2010.

Market researcher IDC estimates global IT spending will increase by 3.8% this year to $1.5 trillion. Global computer shipments are expected to rise 22% this year, while hardware sales should go up 6.4% and software sales 3%.

Meanwhile, Forrester Research estimates that worldwide spending on technology products and services will reach $1.6 trillion.

So what's behind all this growth?

Paul Sagan, the chief executive officer of web services company Akamai Technologies, Inc. (Nasdaq: AKAM), credits his industry's success to a technological "revolution" that has increased consumer demand and business.

"The more places people connect for rich media and video, the better for our business," said Sagan.

Sagan said Akamai has seen an "explosion of use" in regards to mobile computing technologies, with volume growing "for years to come."

In the long run, Sagan may be right, but there's more to it than that. Principally there are three factors that will send technology companies soaring to new heights in the second half of 2010:

•Business Spending
•Emerging Market Growth
•And Industry Consolidation

Corporate Spending Bolsters Tech Growth
Technology demand is rising this year because corporations that were flogged by the global downturn are now in a more stable position and seeking to upgrade outdated computers, servers and storage systems. By giving employees newer, more efficient machines and software, companies can consume less power and increase production.

"Recent upticks in corporate IT spending are catching up with investments that were delayed by the worldwide economic unpleasantness," Michael Dortch, an analyst with tech research group Focus, told MarketWatch. "The prospect of reducing energy costs while improving IT performance and manageability is very compelling."

Despite Apple Inc.'s (Nasdaq: AAPL) iPad cutting in to the PC market, business spending helped global PC shipments rise 22.7% in the first quarter. Intel (Nasdaq: INTC) CEO Paul Otellini said recent data suggest the average corporate netbook supply is about four years old and desktops about five years old, meaning companies will be swapping outdated models for newer hardware.

Proof of the corporate tech-spending spree is evident in earnings reports. Oracle Corp. (Nasdaq: ORCL) and Accenture (NYSE: ACN) reported better-than-expected results this year, and both generate most of their revenue from businesses.

Dell Inc. (Nasdaq: DELL), the world's largest PC maker, expects corporate tech spending to boost revenue as much as 19% this year.

Businesses are also earmarking more IT funds than ever before to invest in cloud computing. Cloud services revenue will reach $68.3 billion this year, a 16.6% jump from last year's $58.6 billion, and will hit $148.8 billion by 2014.

"IT managers are thinking strategically about cloud service deployments; more-progressive enterprises are thinking through what their IT operations will look like in a world of increasing cloud service leverage. This was highly unusual a year ago." said Ben Pring, research vice president at Gartner Inc.

Gartner believes worldwide spending on technology products and services will grow 5.3% to reach $3.4 trillion in 2010. Its forecast is higher than that of IDC and Forrester because its calculations include telecom spending, which the firm expects to hit close to $2 trillion in 2010.

"At the end of the day, IT spending is picking up because users increasingly realize just how dependent they are upon IT to survive, let alone to thrive competitively," said Focus' Dortch. "And those companies that have been able to keep their IT infrastructures updated are best positioned to survive and thrive as economic conditions improve."

Emerging Markets Pick Up Speed
Of course, businesses aren't the only ones using their checkbooks to drive a rebound in the tech sector. Consumers around the world are lifting the industry to new heights - especially in China.

In a KPMG survey, 60% of tech executives said they expected China to contribute more to their bottom lines this year than any other country.

"A lot of the growth now is being fueled by what's happening in Asia," Gary Matuszak, KPMG's global tech sector leader, told BusinessWeek.

Emerging markets are expected to account for 11% of global tech spending this year, up from 2009's 8%, which should make up for Europe's weak economy.

Europe's financial recovery is much rockier than that of the United States, meaning corporate tech spending is not bouncing back there, and the euro's fall against the dollar is not helping tech companies' European sales numbers.

But IDC says media tablet sales will continue to grow in the Asia/Pacific region, leaping from 1.3 million shipments this year to 9.6 million units in 2014. And that's largely because of the success of Apple's iPad launch.

"In Asia in particular, the iPad is likely to spark off intense competition from Asian brands, leading to a wealth of offerings in varying price tiers," said Bryan Ma, Associate Vice President, Asia/Pacific Devices and Peripherals Research at IDC. "With operators migrating towards 4G networks in the coming years, media tablets will further become a strategic vehicle for increased mobile data usage. There are certainly roadblocks, but the media tablet appears here to stay."

Indeed, Apple's success this year with its iPad release and iPhone upgrades pushed it past Microsoft Corp. (Nasdaq: MSFT) as the largest U.S. tech company and revived a dormant tablet computer market.

"There is a lot of enthusiasm from a demand perspective for some of the new Apple products and other devices that have captured people's imagination," Hans Mosesmann, an analyst with Raymond James & Associates, told The New York Times.

Since Apple announced its iPad debut, other companies have scrambled to get their own versions on the market, with some companies giving the product a twist to reach consumers Apple might not have yet reached.

Cisco Systems (Nasdaq: CSCO) will target corporate users early next year with its tablet, Cius, which is geared toward video conferencing and business software applications. Cisco is catering specifically to business clients by shipping the Cius with a bundle of security and management controls that will appease IT departments.

"We think a lot about the consumerization of IT," Barry O'Sullivan, the senior vice president in Cisco's voice technology group, told The New York Times. "The people we work with in IT are caught in the middle of that trend."

Hewlett-Packard Co. (Nasdaq: HPQ) and Google Inc. (Nasdaq: GOOG) are creating their own tablet versions, and Google stands to profit from companies using its Android operating system in new tablets and smartphones.

Chipmakers, like Samsung Electronics and Toshiba Corp., are also poised to profit from tablet and smartphone growth.

Tech Companies On a Shopping Spree
Finally, a surge in earnings has left tech companies swamped in cash, which means a new wave of mergers and acquisitions (M&A) could be beginning to break.

Companies in the Standard & Poor's 500 Index tech sector held $145.7 billion in cash at the end of the last reporting period - 36% more than the end of 2006.

From the end of 2007 to the end of 2009, the 10-richest tech companies increased their cash levels by 48%, to an aggregate $210 billion, outpacing every other major business sector in the U.S. economy. Apple ranks highest with $41 billion, Microsoft second with $39.7 billion, and then Cisco with $39.1 billion and Google with $26.5 billion.

"Keeping cash on hand for a rainy day is a good idea. The currency stores at some tech firms, however, leave them prepared for a stormy 40 days and 40 nights," Patrick McGurn, from RiskMetrics, told MarketWatch.

Tech's M&A activity is nothing like it was in the blockbuster year of 2007, but rising profits are increasing banks' willingness to lend to tech, and 2010's increase in company buyouts is bringing the sector back to a normal level of M&A.

U.S. companies spent $10.5 billion on acquisitions in the first quarter and more than $12 billion in the second quarter.

Now that companies can afford to shop, they are aiming to diversify and expand their offered products. Look for companies to branch out of their specialty areas to stay on top of rapidly shifting industry trends. A consolidated tech company is more attractive to corporate clients who want a one-stop vendor for their IT needs.

IBM (NYSE: IBM) Chief Executive Officer Sam Palmisano said his company plans to spend $20 billion on acquisitions through 2015 - more money than it spent on M&A activity in the previous 10 years. IBM on May 24 announced it would buy software company Sterling Commerce from AT&T (NYSE: T) for $1.4 billion to enhance its cloud computing business.

Software company Oracle paid $7.4 billion to venture into the hardware business by acquiring Sun Microsystems. And Dell bought Perot Systems to gain entry to technology services.

In May, SAP (NYSE ADR: SAP) bought Sybase (NYSE: SY) for $5.8 billion, giving it the ability to deliver back-office and sales applications on smartphones and tablets. The buy is expected to boost SAP's sales this year by 7%, or $14 billion.

The benefits of takeovers and consolidated companies should become even more evident after 2010, when companies are fully integrated and have smoothed out systemic changes.

Strong Leaders and Secular Plays Offer Good Buys
A mix of tech powerhouses and smaller yet prolific companies are among top analysts' stock picks.

Microsoft got a boost this year from Windows 7, which has sold 150 million copies since its October debut, making it the company's fastest selling operating system. Although analysts say companies benefiting from tablet sales will keep a lid on Microsoft's short-term stock climb, the continued need for corporate tech upgrades will keep Microsoft a favorite in the long-term.

Another stock catching attention is SanDisk (Nasdaq: SNDK). The company creates and designs high-speed memory for smartphones, digital cameras and some laptops. It's up 38% this year and has doubled from its price a year ago.

"It's somewhat of a cult stock," said Raymond James' Mosesmann. "Over the past six months, it's been rocking and rolling."

To increase company stability during tech industry downturns, SanDisk shifted its business model so it now sells memory cards directly to device makers and sellers instead of individual consumers. It now has more control over product pricing.

EMC Corp. (NYSE: EMC) reported a 92% profit jump earlier this year and its shares have climbed 8% in 2010. EMC broke through its 50-day moving average this week and analysts expect it to keep climbing.

"Storage remains a top (technology) spending priority, and we believe EMC is well positioned in this area," Oppenheimer analyst Ittai Kidron wrote in a note to investors Tuesday. He set a target price of $22 and upgraded the stock to "Outperform."

Akamai Technologies, which facilitates the delivery of content and applications over the Internet, is in the top 10 performers in the S&P 500, climbing 64% so far this year. It joined in recent M&A action and bought mobile web services developer Velocitude in June. Velocitude's mobile services platform helps companies with mobile web development in commerce and marketing applications.

First-quarter Akamai profit was up 10% to $41 million, and second quarter results are expected to beat expectations due to a recent drastic increase in Internet traffic from World Cup coverage.

VMWare Inc. (NYSE: VMW), a leader in making software for businesses' IT solutions, beat analysts' estimates for first-quarter earnings and its stock is up 52% this year thanks to the uptick in corporate IT spending. Its revenue rose by over a third in the first quarter.

Goldman Sachs Group Inc (NYSE: GS) upgraded the stock this week to "Buy" from "Neutral" and raised earnings per share estimates for the next three fiscal years. The company has faced little competition from rivals in the enterprise software market and is poised to profit from software agreement renewals that are about to come due.

Source :

Money Morning/The Money Map Report

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