Now raising intellectual capital
Tech results give few clues to economy: Eric Auchard
LONDON, July 24 (Reuters) – Investors have proved all too ready to interpret positive earnings trends from Intel, IBM and Apple as signs of economic recovery and to justify a continued rally in technology stocks.
Now they are taking the wrong lessons in reverse by reading disappointing results from Microsoft Corp as evidence that a nascent rebound in the economy has stalled.
By the same token, it’s mistaken to read the best quarterly results in two-and-a-half years for Samsung Electronics, the world’s biggest maker of memory chips, as any indicator of progress on the economic front.
Look past the headlines and you’ll find factors specific to each of these companies that say little about any fresh demand for technology in this economy.
The truth is that technology companies have done a terrific job of cutting costs and preserving cash flow, even as revenue growth has continued to shrivel or turn negative. (See Reuters analysis).
Remember why investors put up with the volatility of technology stocks in the first place? Winners in the sector are famous for generating outsized growth for hot products or services independent of economic cycles.
Microsoft’s fiscal year-end results reflect the dynamics of the company’s own product cycles as much as the economy. The company reported its first-ever drop in annual sales of Windows software as overall revenue fell by 17 percent.
But the world’s largest software maker is on the cusp of a major upturn in its business that is expected to follow the introduction of the next version of its operating system, Windows 7 in October. It’s natural, then, that business and consumer buyers might pause until Windows 7 gives them new reason to buy PCs in 2010 and beyond.
Sure, the company blamed a poor macroeconomic climate. But Microsoft has been saying much the same thing for the past year, namely, that an “economic reset” to lower levels of growth is underway in the world.
Meanwhile, Samsung’s quarterly results out Friday showed it benefiting from a recovery in memory chip pricing that is only indirectly related to underlying economic demand. Firming pricing in memories followed a two-year industry slump created by a glut of over production. Again, no signs of economic uptick here.
Samsung, which is also the world’s second largest maker of mobile phones, is enjoying robust demand for these products thanks to clever designs. These are stealing market share from rival mid-priced phones. The gains are coming in spite of an expected 10 percent drop in global cell phone demand this year.
Furthermore, the positive results earlier this month from Intel and IBM said less about the economy than they did about the success of specific turnaround strategies the companies have been put in place over the years (See Intel column).
IBM has sharply raised its 2009 year earnings outlook as it has refocused on higher-margin software and services businesses instead of hardware. This success is a product of financial reengineering and cost-cutting, not improving demand. Note that IBM revenue is set to fall 9 percent in the course of 2009.
In general, second-quarter results have provided further evidence that technology demand is stabilizing, albeit at lower levels.
The danger for investors is reading too much into these reports. Half way through the year, there is little evidence of fresh corporate spending or new consumer demand for technology. Outside China, much of the activity has been restocking of depleted inventories. Economic recovery remains illusive.
– At the time of publication Eric Auchard did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can read some of Eric’s recent columns here.–
(Editing by David Evans; Photo: Reuters/Rick Wilking)