AMSTERDAM: Technology bellwethers have disappointed with weak first-quarter sales and softer outlooks, but shares have risen as profit margins are on the rise, investors said on Tuesday. The two trillion dollar global technology industry, which combines everything from software to semiconductors and handsets, experienced one of its toughest quarters as economic uncertainty, seasonal weakness and over investment were blended with the impact of the deadly SARS virus and war in Iraq.
Even so, after hitting a low just before the start of the war in Iraq, the tech-heavy Nasdaq index has risen 16 percent, while the European tech index and the Philadelhia Semiconductor Index are up about 33 percent. By comparison, the wider FTSE European top 300 is up 20 percent. Tech stocks outperform the wider market on the premise that things will get better now that the war is over and SARS might be contained in a few countries. Tech stocks should benefit most because demand for technology products can rise much faster than for other products, like food and drink.
And with costs much lower now than last year, growth in demand could lead to big jumps in profitability.A recovery is in sight, but not just yet, said UBS Warburg global tech strategist Pip Coburn. "2003 is extremely back-end loaded," he said in a note.
In fact, expectations for many markets have just been trimmed after the weak first quarter. The $140 billion semiconductor industry is now forecast by analysts to grow by up to 10 percent, from a previously hoped double-digit rise after the sector's worst ever slump in 2002.
NETWORKS EVEN WORSE
In communications networks the situation is even worse. France's Alcatel and Sweden's Ericsson on Tuesday were the last of the world's top seven communications networks makers to report on the first three months of 2003, and underlined that there seems no stopping the market decline.
Analysts say the $97 billion global market for telecommunications equipment is expected to decline by some 17 percent this year. The remaining $80 billion will be less than half of the $173 billion of the record 2000 when operators frantically invested in new fixed and mobile networks and oversupplied the market with a glut of communications capacity.
Meanwhile, software makers toned down expectations for growth in 2003, including the world's largest software maker Microsoft, which sees up to five percent growth next fiscal year. Single-digit growth may seem paltry by the standards of the traditionally high-growth tech stocks. But even when sales continue to fall in some sectors, this need not be a major worry, said Rob van Oostveen, a hardware analyst at ABN Amro Asset Management who helps oversee $30 billion of investments.
"In communications equipment the first quarter of next year might even be slightly worse than the first quarter this year, but we're close to the bottom, and cost savings are now coming through in full speed. Profit margins are rising," he said. Profit margins are also up at leading semiconductor makers, but oversupply means weak prices and, without much stronger demand, they will have to consider shutting more plants soon.
CONSUMERS AND EMPLOYEES
Ultimately, demand for technology products is driven by consumers and employees, whether directly through buying of items like mobile phones, computers and DVD players, or indirectly through more demand for high-speed Internet services that require investment in advanced communications networks.
To that end investors may draw confidence from upbeat sales growth expectations by Finland's Nokia and San Diego, California-based Qualcomm, two proxies for the global handset industry. However, rivals Motorola, Siemens and Sony Ericsson appeared much more cautious.
And Japanese consumer electronics behemoth Sony last week shocked investors with below-target first-quarter results, more restructuring and a weaker outlook, while Europe's top consumer electronics maker Philips from the Netherlands booked flat core sales. "Fundamentally the outlook remains very unclear," said fund manager Jaap Westerling at Optimix Technology Fund in Amsterdam.