Tech: Slow at Home, Growing Abroad
Any hope that the surprisingly strong financial results from IBM (IBM) signaled a technology stock rebound was quickly dashed. After the stock market closed on Jan. 15, chipmaker Intel (INTC), another closely watched bellwether, reported disappointing financial results for the fourth quarter and a subdued outlook for the future. "It would be imprudent not to be cautious," said CEO Paul S. Otellini in a conference call with investors, citing concerns about the U.S. economy. Intel shares plunged 12.6% the next day.
It's a sign that already-rattled tech investors could face more trouble ahead. The technology-heavy Nasdaq composite index has tumbled 9% since the beginning of the year, dropping for 9 out of 12 trading days. Intel's caution is particularly worrisome because chip companies tend to be an early indication of what's ahead for the rest of technology. Apple (AAPL), Microsoft (MSFT), Motorola (MOT), and AT&T (T) are slated to report their financial results in the next two weeks.
One key factor in how these companies perform will be geography. While tech spending in the U.S. is expected to slow down with the economy, spending abroad remains relatively healthy. As a result, the tech companies with the most exposure to overseas markets, such as IBM and Hewlett-Packard (HPQ), stand a better chance than those more dependent on U.S. consumers and companies. "Large bellwethers with international exposure will probably fare better in this type of an environment," says Scott Kessler, head of tech sector equity research at Standard & Poor's (MHP).
With the housing downturn and credit crunch, Americans may struggle to keep up their purchases of computers, software, and other gear. In 2007 tech spending increased at roughly the same 7% rate in the U.S. and outside, according to research firm IDC. But this year tech spending in the States is expected to slide, while growth abroad maintains the same clip. IDC is currently predicting 3% to 4% growth in the U.S., and analyst Stephen Minton warns it could be much lower. "If a recession took hold, we'd end up with no growth—as long as the recession was short," he says.
Which companies have the least exposure to the U.S.? IBM is among the most diversified abroad, with just 39% of its revenues coming from inside the country. Other companies that get less than half their revenues from home include HP, Oracle (ORCL), and Sun Microsystems (JAVA), according to financial filings. In contrast, AT&T and Yahoo! pull in the majority of their sales from the U.S.
Of course, geography isn't necessarily destiny. Strong products generate sales even in a soft economy. Google (GOOG) and Apple get more than half of their revenues from the U.S., and both are expected to see strong growth in the year ahead. Intel says it gets 75% of its revenues from outside the U.S.
Still, for most of the tech companies dependent on customers at home, the year ahead looks full of challenges. "The U.S. economy is clearly heading into the sewer," says Roger L. Kay, president of consultant Endpoint Technologies Associates. "People don't know how customers are going to behave."