The following illustrates the "hot and cold" nature of the current tech environment.
IT spending slowing
From IDC, we have the following prediction: "Worldwide IT spending will grow at a slower pace in 2008. Economic uncertainties and downside risk will dampen IT spending growth in the U.S. and elsewhere. As a result, worldwide IT market growth will be a moderate 5.5-6.0%, down from 6.9% in 2007."
From InformationWeek, we have the following quote: "In the most recent survey by the Society for Information Management, less than half of 130 CIOs and IT managers who responded (49%) predict their IT budgets will be larger next year than this year. Almost a third (30%) say their budgets will stay the same, and 21% say they'll have less IT dollars next year. In comparison, 61% say their 2007 IT budgets were greater than their 2006 budgets, 17% say they were the same, and 22% say they got less this year than last." InformationWeek conducted their own survey with similar results.
Slowing IT spending always impacts the business software vendors. As written in Barron's, we may have one exception this time: Oracle (ORCL). According to Cowen, Oracle looks to continue its strong growth trend into 2008 but analyst Peter Goldmacher advises investors they shouldn't take Oracle as a proxy for the whole software industry.
Telecom spending a bright spot?
Cisco, in their latest earnings announcement, almost single handed initiated the most recent downturn in tech stocks by indicating "lumpy" sales into automotive and financial IT shops. A very recent report that AT&T (T) will be buying Cisco (CSCO) core routers is a new positive for Cisco and could be an indication that demand remains strong from telecom companies. AT&T explained their expansion plans by noting that Internet traffic had doubled in the last couple of years.
Consumer electronics are hot!
Consumer electronics are selling well. Apple (AAPL) has made gadgets sexy again and this benefits most other gadget makers and the specific semiconductor companies supporting them. Sony (SNE) and Apple, for example, are both seeing strong sales thus far during the holiday shopping season, especially on "Black Friday". Apple shares are hitting highs and the company is sitting on $15B in cash.
A recent theme in the semiconductor industry has been growing overcapacity. Overcapacity has two effects. First, it holds down prices of certain types of semiconductors thus squeezing margins of chip manufacturers. Memory chips are a prime example: DRAM and NAND stocks all encountered big sell-offs this year as unit prices fell due to oversupply. Second, until the overcapacity is absorbed, it will tend to weaken demand and impact sales in semiconductor equipment, thus negatively affecting another tech sub-sector. Indeed, Gartner (IT) sees a 4.4% decline in capex in 2008, instead of a previously predicted 4.8% increase, and a flat equipment market (0.3%) vs. anticipated 6.2% growth.
There is still strength in tech but it is not across the board. Some sectors will do well (consumer electronics, telecom suppliers), some not so well (semiconductor equipment). Within sub-sectors, there are individual stocks that may continue to do well (Oracle) while the rest of the sub-sector struggles. International results may provide a boost for some companies but not for others. 2008 will require a much more careful approach to tech stocks to achieve superior results.