Tech stocks poised to see strong rebound in 2010
IN 2009, tech companies certainly saw the global economic meltdown take a “byte” out of their profits. Earlier in the year, the overall industry, which consists of tech firms ranging from personal computer (PC) vendors to software and chip makers, saw its sales and earnings plummet in the first two quarters of calendar 2009. However, as more and more tech companies consistently reported better-than-expected financial results in the third quarter, many corporate executives and analysts are of the opinion that this sector is well positioned to be one of the first industries to achieve a sustainable recovery in 2010. In fact, the industry’s performance last Friday lends support to this notion.
On the heels of strong results reported last Thursday (December 17, 2009) evening by two top players in the sector, Research In Motion Ltd (NASDAQ: RIMM) and Oracle Corp (NASDAQ: ORCL), tech stocks closed higher the following day, giving investors in the industry another reason to be jolly during the holiday season. Resultantly, the technology-laden Nasdaq Composite surged 1.45 per cent or 31.64 points to close at 2,211.69 points, outpacing both the Dow Jones Industrial Average (DJIA) and the Standard & Poor’s 500 Index which climbed 0.20 per cent and 0.58 per cent to 10,328.89 and 1,102.47 points respectively. More convincingly, the Nasdaq Composite has proven to be the most resilient index during the recession, soaring 41.89 per cent since the start of the year to December 21, 2009, while the DJIA, which consists of 30 of the largest and most widely held public companies, has only risen 18.66 per cent- providing yet another reason for the bullish outlook on the tech sector.
ORCL, which is considered a bellweather for the tech industry because it provides a wide range of software to a variety of industries, saw net profit for its second quarter ended November 30, 2009 (Q02 2009/2010) jump 13 per cent to US$1.46 billion (US$0.29 per share), up from US$1.3b a year ago. Excluding certain costs, net income stood at US$0.39 per share in the period, topping analysts’ average estimate of US$0.36. These results, which are also insightful because they are one of the first to include earnings for November, strongly suggest that the spending freeze on corporate technology, the industry’s most recent plague is finally thawing. As a result, Wall Street reacted positively last Friday, sending the stock up 6.38 per cent or US$1.46 to close at US$24.34 — in its biggest one-day gain since June 24, 2009 when the stock soared seven per cent to US$21.26.
Similarly, RIMM skyrocketed 10.35 per cent to US$70.03 on Friday after Apple Inc’s (NASDAQ: AAPL) biggest rival announced that net profit for its fiscal third quarter ended November 28, 2009 climbed 58.57 per cent to US$628.4 million (US$1.10 per share) during the period, trumping estimates of US$1.04 per share. RIMM attributed this robust performance to strong overseas sales as well as its effort to target not only business consumers but the wider audience. Thus, the newly redesigned and sleeker-looking Blackberry Curve was hailed the top-selling smart phone in the US in the last quarter. Correspondingly, RIMM was successful in increasing its subscriber base by 4.4 million users.
Two months ago, AAPL delivered comparable results, crushing analysts’ expectations after profit for its fourth quarter ended September 26, 2009 surged 47 per cent yoy to US$1.7 billion or US$1.82 per share. AAPL’s results were boosted by strong sales of its Mac computers, as well as its iPhone which both hit quarterly records during the reporting period. RIMM’s ability to replicate AAPL’s consistent and stellar performance is evidence that consumers are willing to resume spending on non-essential technological gadgets.
It is this type of consumer demand which will bolster the bottom line of a wide range of inter-related tech Companies such as Hewlett-Packard Co (NASDAQ: HPQ), Microsoft Corp (NASDAQ: MSFT) and Intel Corp (NASDAQ: INTC). Accordingly, these stocks were also a part of Friday’s tech rally and have significantly rebounded since the start of the year. Year-to-date (December 21, 2009), HPQ rose 43.26 per cent to close at US$51.99, while world’s largest software maker, MSFT jumped 57 per cent to US$30.52, hitting its 52-week high of US$30.90 on December 22, 2009. INTC climbed 37.04 per cent to US$20.09.
While improved results may be the strongest evidence to date supporting a near tech turnaround, one can look at the industry’s recent mergers & acquisitions (M&A) history as further evidence to the tenacity of the sector. In the face of, or maybe as a result of recent economic conditions, the tech industry continued with is usual bout of activity despite the overall slowdown in M&A in 2009. According to Thomson Reuters data, US M&A plummeted to a 15-Year LO of US$13 billion in August, while global M&A fell to US$72 billion, the lowest level since February 2003.
Given this background, it is quite impressive to see that the ten largest tech deals in 2009 all surpassed the USD1-B mark, a feat which speaks to the strengthening of the industry. Additionally, the M&As were not only concentrated in one subsector, but ranged across segments to include hardware vendors, IT services, storage and wireless infrastructure companies. However, ORCL’s proposed US$7.4 billion acquisition of Sun Microsystems Inc (NASDAQ: JAVA) was deemed the biggest blockbuster deal of the year by technocrats, giving the traditional software maker more ammunition to compete in the database market and the high-end servers market.
As the tech industry continues to change its landscape, producing more efficient vertically and horizontally integrated companies, one can expect to see the return of a booming sector in the upcoming year. With the pre-Christmas season already proving to be successful for tech Companies, the best is yet to come as consumer demand continues to pick up. Further, given the industry’s track record during the downturn, investors should always be sure to consider holding tech stocks as part of their investment portfolio.
Juvenne Yee is a Research Analyst at Stocks & Securities Ltd. You can contact her at jyee@sslinvest.com.