Investors looking for promising pockets in the tech sector are advised to look toward the Internet and some of the larger software vendors. Makers of personal computers and the chips that run them, on the other hand, are in for rougher waters.
As demand for PCs in the U.S. dips, computer makers like Dell ("DELL"), Hewlett-Packard ("HPQ") and Gateway ("GTW") are likely to fight for every shred of market share by cutting prices.
U.S. PC sales may slip 1.5% in the third quarter, says Gartner analyst Miko Kitagawa. "Desktop sales are declining fast, and while notebook sales are strong, they're not strong enough to make up the slide in desktops," she says. Sales to consumers should be healthy, but sales to businesses will be weak.
PRICE WAR. PC demand is likely to set the tone for the semiconductors business. "PC component demand at several U.S. semiconductor companies has been below normal in the second quarter," JPMorgan analyst Chris Danely wrote in a recent research note. That may spell trouble for big makers like Intel ("INTC") and Advanced Micro Devices ("AMD"), but also smaller suppliers like ATI ("ATYT"), Nvidia ("NVDA"), and Micron Technology ("MU").
Analysts including Danely also fret about a server-chip price war between Intel and AMD may be in the offing—if it's not already under way. "Our checks indicate Intel recently cut prices on most of its microprocessors by up to 50% to 60% and generated no elasticity in demand," Danely wrote. "AMD also appears to be cutting prices to keep up with Intel."
PLACE YOUR BETS. The Internet will be among tech's brighter spots in the second half. Advertisers are likely to keep shifting ad spending toward the Web and away from print media, to the benefit of companies like Google ("GOOG") and Yahoo! ("YHOO"), says Global Crown Capital analyst Martin Pyykkonen."The trends in advertising are certainly favorable for both of them," he says.
But investors may want to place bets sooner rather than later, he adds. "If you don't look to buy these things in the Q3 timeframe, as far as the stock, you may be kind of late to the party," Pyykkonen warns. He has an outperform rating on both stocks.
In software, some analysts are bullish about the biggest vendors after Oracle ("ORCL") on June 22 reported one of its best quarters in recent memory and gave an upbeat forecast for the current period. The company surpassed analysts' expectations both in databases and the applications businesses that it has been beefing up through $20 billion in recent acquisitions.
Red Hat ("RHAT") and Salesforce.com ("CRM") should continue to do well, says Credit Suisse First Boston analyst Jason Maynard, who has buy ratings on both as well as Oracle. Red Hat is benefiting from demand for open-source software, while Salesforce is reaping the rewards of an emphasis on "software as a service," where companies access programs via the Net and pay monthly charges instead of installing it on their own computers and paying big up-front license fees.
TRICKY TIMES. Smaller software companies, such as BEA Systems ("BEAS"), Hyperion ("HYSL"), and Cognos ("COGN"), are still selling their wares the old-fashioned way: one big deal at a time.
They're more likely to get squeezed, according to Maynard. "Those guys have had two or three years of sluggishness and they could come back in September, but it looks tricky," he says.
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