Goldman Gets Cautious On Tech, Downgrades Software, Hardware, Indian IT

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Includes: AMAT, AMD, CA, CHKP, CMOS, CVLT, DEIX, KOMG, LXK, MU, STX, TXN
by: Eric Savitz

The technology analysts at Goldman Sachs have started the year by taking a more cautious stance on technology stocks. The firm downgraded its views on the hardware, software and Indian IT services sectors to Neutral from Attractive, and reduced its view on semiconductor capital equipment to Cautious from Neutral. The firm also cut its rating on nine tech stocks, while moving five stocks formerly rated Sell up to Neutral.

“We are taking a more conservative stance on a number of sectors as we transition into the early part of 2007,” Goldman said in a report sourced to analysts Laura Conigliaro, Rick Sherlund, James Covello and Sarah Friar. “Our changes in view is driven by an expectation of mildly decelerating IT spending, seasonal headwinds in both fundamentals and trading patterns, and less compelling valuations post the end-of-the-year move in the stocks.

Goldman’s big call today is based on several factors:

  • The macro outlook suggests 2007 tech spending growth will likely decelerate slightly from 2006. Goldman says that “checks with end customers suggest that the financial vertical will be flat to slightly decreasing, manufacturing will be weaker and communications will incrementally be a little better.” Those three sectors accounts for over 50% of IT spending.
  • Seasonal analysis highlights that technology tends to lag in the calendar first half.
  • Post the year-end rally, current valuations are relatively in line with average levels, presenting less opportunity.
  • Several major technology shifts are gaining momentum in 2007; thus enterprise IT spending patterns are gradually changing.
  • Turnarounds and LBO activity are likely to provide important support for tech, but less so than before. “Targets are generally well known and there is less economic value to be had after tech’s run-up, suggesting that buyers will not chase targets indiscriminately.

Along with the sector downgrades, Goldman reduced ratings on nine tech stocks, while upgrading five.

Downgrades:

  • Directed Electronics (OTC:DEIX): To Sell from Neutral.
  • Komag (KOMG): To Sell from Neutral.
  • Lexmark (NYSE:LXK): To Sell from Neutral.
  • Seagate (NASDAQ:STX): To Neutral from Buy.
  • Check Point Software (NASDAQ:CHKP): To Sell from Neutral.
  • CommVault Systems (NASDAQ:CVLT): To Neutral from Buy.
  • Advanced Micro Devices (NYSE:AMD): To Sell from Neutral.
  • Applied Materials (NASDAQ:AMAT): To Sell from Neutral.
  • Credence Systems (CMOS): To Sell from Neutral.


Upgrades:

  • CA (NASDAQ:CA): To Neutral from Sell.
  • Keane (KEA): To Neutral from Sell.
  • Micron Technology (NASDAQ:MU): To Neutral from Sell.
  • Texas Instruments (NYSE:TXN): To Neutral from Sell.
  • McData (MDTA): To Neutral from Sell.

Of the nine stocks that were downgraded today, seven are lower. All five upgraded stocks are higher.