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Tech Profits Show Strength, But Investor Worries Persist

Reuters
Monday, 21 Apr 2008 | 11:14 AM ET

Now that the first week of the technology earnings is over, many investors are breathing a sigh of relief. By and large, the numbers and forecasts from some sector heavyweights were not as bad as expected.

Some were even better than that.

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Shares of IBM , Intel and Google all rallied last week after the companies posted results, though plenty of uncertainty remains, and Wall Street estimates for the second quarter may well be taken down another notch.

Yet to report are Apple , Microsoft , Yahoo , Hewlett-Packard , Dell and Cisco Systems , to name just a few.

"Right now there is a lot of negativity out there," said John Buckingham, chief investment officer of Al Frank Asset Management.

"I think the economy is going to remain weak for the next couple of quarters." Seagate Technology , the world's largest disk-drive maker, gave a muted current-quarter forecast last week after it noticed U.S. consumers began cutting back in late March.

"People in the U.S. are being cautious," Seagate Chief Executive Bill Watkins told Reuters in an interview. "Every day they are throwing out the newspaper, there's a recession."

His view was supported by researcher IDC's estimates Wednesday that U.S. PC unit shipments grew only 3.5 percent in the first quarter, down from 8 percent growth in 2007.

"In my view, there's still going to be some turbulence probably until sometime in the summer or as late as mid-fall," said Jerry Dodson, president and chief investment officer of San Francisco-based Parnassus Investments. "You're still talking about a weak economy for most of the year."

Still the good news last week gave investors some hope.

Intel, the world's largest chipmaker, said its core microprocessor business was "strong" at the moment, and Chief Executive Paul Otellini, who was in Europe two weeks ago, said he saw no red flags either there or at home.

"From an economic standpoint, the two most mature of our markets (Europe and the United States) are not showing any signs of weakness," he said on the company's conference call. "I did not pick up anything." Google and IBM said much the same thing.

"We're well positioned for 2008 and beyond, regardless of the business environment," said the Web search giant's CEO, Eric Schmidt.

"Second-quarter guidance has been fine, and estimates are generally not falling as many feared," said Justin McNichols, a portfolio manager at Osborne Partners Capital Management in San Francisco.

"Entering the first-quarter earnings season, 2008 estimates for the S&P Tech sector were for a 6 percent year-over-year increase," he said.

"Going into earnings, sentiment was this number was not achievable.

Coming out of earnings, it appears at least the first half is achievable."

But there are still shoes that could drop.

The weaker economy is forcing U.S. consumers to find ways to cut their phone bills, for example, likely limiting profit growth for the likes of AT&T and Verizon Communications .

Top mobile phone maker Nokia rattled the market last Thursday by partly blaming the U.S. economy for an estimated drop in the global mobile phone market in euro terms in 2008.

"We're not done seeing some more pain, but that just might be in some of the specific end markets," said Henry Asher, president of New York-based money manager Northstar Group.

"The consumer has pulled back so sharply." Market research firm NPD Group Friday released a study showing that in just two months, the number of consumers who believe the U.S. economy is in or heading toward a recession or slowdown rose to 84 percent from 79 percent.

"Consumers are generally the last to react to economic downturns; they don't want to halt or cut back on spending, but it is clear they're beginning to throttle back," said Marshal Cohen, NPD's chief industry analyst.

Pockets of strength, though, include Internet companies and the video games sector, whose companies have yet to report.

"Google's 46 percent revenue growth and eBay's out-performance on both the top and bottom lines show that the Internet has yet to see adverse effects from the slowing economy," Jefferies & Co analyst Youssef Squali said.

"This bodes well for the rest of the group." Apple Inc stock rose 9 percent this week, helped by industry data fueling optimism over Macintosh computer sales and rosy forecasts from Mac processor supplier Intel.

Analysts are also growing more confident that Apple will unveil a faster, sleeker iPhone at a company event in June.

That should boost sales of the device and help Apple meet its target of selling 10 million units by the end of this year.

Another bright spot is video games, with U.S. sales jumping 57 percent in March, driven by new games and sustained enthusiasm for Nintendo's Wii console.

Industry leader Electronic Arts is expected to show strong sales of games like "Burnout: Paradise" and "Army of Two" when it reports quarterly earnings early next month.

EA is also bidding $2 billion for Take-Two Interactive Software , whose "Grand Theft Auto 4" is expected to pull in $300 million to $400 million in revenue within a week of its April 29 launch.

Such games drive demand for consoles from Microsoft and Sony . Nintendo sold 720,000 Wiis to U.S. consumers in March, better than any non-holiday month.

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