The backdrop for technology investing has clearly been extremely difficult for an extended period of...
The backdrop for technology investing has clearly been extremely difficult for an extended period of time. The 11 September guaranteed that the vast majority of IT companies would miss consensus earnings expectations for the September quarter.
The immediate knee-jerk reaction was to sell technology stocks. However, a rally has ensued since late September. The significant policy responses of monetary and fiscal stimuli should create a more benign environment for technology investing in 2002 as investors look towards improving end market demand.
PC demand has been poor since early 2000 but is likely to improve considerably by the middle of 2002, driven by a corporate PC upgrade cycle. This will follow approximately three years after the 1999 Y2K-inspired upgrade cycle.
Although wireless handset demand has been very poor this year, with market saturation cited as a major issue, the availability of 2.5/3G services by mid-2002 will catalyse an upgrade cycle that will strengthen as 2002 progresses.
Moreover, the component supply chain to the wireless handset manufacturers is now free of the excess inventory that prevailed from autumn 2001 until recently.
Other areas of IT that should experience a strong rebound when corporate budgets are increased next year are those software and storage infrastructure companies that can demonstrate irrefutable return on investment benefits. Mercury Interactive, the leading application testing company and Brocade Communications, the leading Storage Area Networking company, are potential beneficiaries.
As is well known, telecommunication service providers have drastically scaled back capital expenditure plans. The emerging providers have been plagued by excessive debt burdens and many are close to bankruptcy. Meanwhile, incumbent carriers are experiencing profitability issues.
Less intense competition is allowing these carriers to cut capital expenditure on a continuing basis. Consequently, although many telecommunication equipment stocks have suffered significantly, there seems little prospect of any fundamental demand catalysts until late 2002. Moreover, the component supply chain in this subsector generally continues to suffer from excess inventories.
Semiconductor stocks as a group have experienced great volatility, as inventory adjustments have distorted order patterns. Currently, it seems that although capacity utilisation for the industry is low, very positive assumptions on recovery are embedded in stock valuations. The primary assumptions are near-term sustained revenue growth and margin expansion. These assumptions appear ill founded.
The preceding comments would imply a negative perspective on semiconductor capital equipment stocks. Order rates for many semiconductor capital equipment companies are currently deteriorating rapidly, which is undermining valuations. No fundamental pickup in demand seems likely until late 2002.
PC upgrade cycle in 2002.
Wireless handset supply chain is lean.
Software fundamentals bottoming.
Lack of innovation for solutions
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