Tech Boom?

Tech Boom? (INTC and IBM)

By: Daniel Carroll, Courtesy of Vestopia

Who would have thought. Amid the worst debt crisis in 70 years, a couple of tech companies raised their forecasts. What’s going on?

While we are seeing a boost from the falling dollar for sales denominated in foreign currencies, we are also seeing surprising strength in the US. Most of it seems to be on the server side, with help from notebooks and laptops, both of which are high margin categories. In the case of Intel, they are also regaining share from AMD. Intel’s earlier 1Q downward revision centered around weakness in flash memory partly brought about by their own doubling in capacity, something not likely to be repeated in a while. Google’s and Amazon’s spending drive on hardware was cited briefly, but suprisingly they are not seeing cutbacks in spending from financial companies.

So what’s going on? Didn’t anyone tell these companies we are in a recession?

I see several drivers of growth:

1. Intel is in the lead on the product cycle, with a technology advantage over AMD. This may or may not last, but it is providing a wind in their sales right now.

2. Intel actually has pretty easy comparisons, especially with respect to margins. This will be true for at least another 12 months. Tech spending has seen fairly anemic growth for several years now, so comparisons are likely to be easy for many companies.

3. The hangover from the spending binge in 1998-2000 is gone – we are now in our second upgrade cycle since that time.

4. The Vista product cycle is also helping, as is customers now purchasing multiple laptop/notebook computers.

5. Corporate customers see technology spending as business critical and as a means to cut costs/improve productivity, rather than as discretionary to be cut in times of trouble.

6. In times of trouble, customers tend to buy from blue chip suppliers, rather than “take their chances” on 2nd tier players (even if the difference is only one of perception).

7. The weak dollar is not only helping with currency translation (primarily an accounting issue) but is also driving down the cost of technology in international markets, stimulating demand.

8. Technology manufacturing is not heavily influenced by commodity pricing – a headwind in other industries.

I wouldn’t expect this to hit evenly accross all technology companies. It appears that most of the strength is in the enterprise, not the consumer. And it is not yet clear how software will be impacted, though I am optimstic on Microsoft’s earnings.

Will it last? These things always go in cycles, and this cycle will eventually run its course. However, if the dollar stays low, I would expect a technology export boom as the sector is likely to be among the first and most immediate beneficiaries.

Will the economy impinge on the growth? It already has – if the economy were stronger, then growth would likely be better. However, if the economy exhibits another leg down, then it would be difficult to imagine the current strength holding up.

While this does not necessarily impact their valuation (my valuation estimates incorporate variability and unpredictability in earnings forecasts), it’s nice to see some good news.