Markets: June Starts Slow, but Hope for Tech Companies in 2012 Remains

By Marc Ferranti, 2-Jun-2012

Tech shares drop in wake of jobs market report

June is off to a rocky in the markets for technology companies as shares slump in the wake of troubling economic reports, though cooler heads appear to have confidence in the sector for the long term.

The Nasdaq computer stock index was down by 2.27 percent, or 24.92 points, to 1495.70 in Friday afternoon trading. Stocks in general dropped Friday after the Department of Labor issued a report saying that U.S. companies added only 69,000 jobs to their payrolls in May. It was the smallest jobs gain in a year, and missed forecasts that called for almost 160,000 new jobs. What's more, the unemployment rate increased to 8.2 percent from 8.1 percent, the government report estimated.

The Dow Jones Industrial Average declined 216.72 points to 12,176.73, the Standard and Poor's 500 declined 26.37 to 1,283.94 and the tech-heavy Nasdaq dropped 64.66 to 2,762.88. The Nasdaq's decline, dropping by 2.27 percent, was the greatest drop in percentage terms.

Continued reports this week that Spain or Greece, under the burden of massive debt, might leave the Euro zone, have made prospects for continued economic recovery as uncertain as they have been over the past few years.

Tech companies across the board have been hit. IBM was down Friday afternoon by US$3.34 to $189.57; Cisco was down $0.28 to $16.05; Microsoft dropped $0.57 to $28.62; and even the mighty Apple was down $13.13 to $564.53. Facebook -- whose IPO two weeks ago was marred by technical glitches, the after-the-fact realization that the offering was overpriced, and allegations that the lead underwriter, Morgan Stanley, may have committed infractions of financial rules by telling a small circle of people about a downward revision in revenue forecasts -- was down $1.75 to $27.84. Facebook shares are now well below the $45 hit on its IPO day.

Nasdaq computer stocks are now down more than 12 percent from their highs earlier in the quarter.

With earnings season a month away, market watchers trying to get a sense of the year ahead are focusing on macro economic news, various market research reports and week-to-week news from leading tech vendors.

Stocks in general dropped Friday after the Department of Labor issued a report saying that U.S. companies added only 69,000 jobs to their payrolls in May

Factory revenue in the worldwide server market decreased 2.4 percent year over year to $11.8 billion in the first quarter of 2012, according to a report from IDC released this week.

It was the second consecutive quarter of year-over-year revenue decline, according to IDC. One reason for the year-over-year slump was that the server market in 2011 experienced an uptick as companies refreshed their computing infrastructure, making it difficult for manufacturers to achieve relative gains this year.

Nevertheless, there are other reasons to be concerned.

"The larger concern for server vendors was the sharply lower revenue growth in Asia/Pacific, including China," wrote Matt Eastwood, in the report. "China is one of only three countries that regularly spend more than $1 billion quarterly on servers and any sustained reduction in revenue growth would be troubling for the market."

Research In Motion this week had troubling news, as it warned that it is forecasting an operating loss for the quarter. The beleaguered manufacturer of the BlackBerry said competition was hurting business. It has hired several investment banks to help it come up with ways to shore up its finances, including licensing its OS.

A week earlier, Hewlett-Packard said it would cut 27,000 employees as part of a long-term restructuring plan. The company's net income for the second quarter, which ended April 30, was $1.6 billion, plunging 31 percent year-over-year.

Not all forecasts on the tech front are dismal, however. Piper Jaffray analyst Gene Munster this week reiterated his forecast that Apple could hit $1,000 a share this year because of upgrades to products including iPhone and Mac, the iPad and iPhone.

Though some vendors will have a tough time in an uncertain market this year, overall, the prospects for bellwether tech vendors may not be too bad, according to other market watchers. Financial forecasts have already taken into account economic headwinds, and may have given too much weight to negative trends, pointed out Canaccord Genuity equity strategist Tony Dwyer.

The debt crisis in Europe and the decline in global equity markets, coupled with fears about the U.S. economy, appear to assume "a recession that remains unlikely given the historic availability of money," wrote Dwyer in a technical market analysis this week. Dwyer said he forecasts the S&P will gain approximately 15 percent this year, closing at 1,575.

In the near-term all eyes will be on tech companies that are first to report for their quarters, including Oracle, VMware and Red Hat, in late June. According to Richard Davis, another Canaccord analyst, these companies are expected to turn in decent quarters.

Source: IDG News Service

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