After such a difficult year for technology stocks, it would seem that 2009 can’t arrive quickly enough. Well, maybe not.
For several components of the tech sector, Wall Street analysts believe 2009 will be a year of transition. The first half will be painful, the second half slightly better, but the real recovery
won’t occur until 2010.
Here's the outlook for five key sectors.
From Apple’siPhone 3G to Research in Motion’s new lineup of BlackBerry handhelds, smart phones were all the rage in 2008. Next year, however, promises to be a tough one for the industry.
“We expect Q1 ’09 to be the worst absolute quarter in terms of year-over-year decline for the industry,” says Michael Walkley, analyst at Piper Jaffray. “We’re modeling a 16-percent drop in year-over-year handset sales in Q1 ’09, and finishing down 9 percent year-over-year for 2009.”
Fueling this slowdown is a global inventory correction. Walkley says that with small and mid-tier distributors having trouble raising capital, global channel inventory will fall to four weeks from its normal six-to-seven week levels.
“Everyone’s anticipating weaker trends into 2009, so everyone wants to hold on to cash,” Walkley says. “This slowdown we’re seeing is much more of an inventory correction than that of demand.”
The strongest players,Nokia , Apple, and RIM, will emerge even stronger as struggling companies such as Motorola and Sony Ericsson see their market share erode even further, say analysts.
“If you look at the last downturn, six handset companies ended up going out of business,” Walkley says. “It’ll be survival of the fittest, and you’ll see the potential for some companies to shut their doors, and the ones who survive will come out stronger.”
With smart phones becoming mainstream, 2009 may finally be the year the mobile Web gains significant traction. If so, that’s good news for Google , says Troy Mastin, analyst at William Blair & Co.
“There’s a big advertising opportunity there to extend some of the successful forms of marketing on the Web today to the mobile channel,” he says. “Google is in as good a position as anyone to be a winner.”
New devices from Nokia, RIM, and possibly Apple, will further boost mobile Web use. And Mastin believes more consumers may ditch their home Internet services in favor of using mobile devices for Web access as a way to cut costs.
But changing dynamics leave Microsoft and Yahoo in a difficult position.
“They tend to rely more on display type advertising, and the portal model continues to get marginalized in 2009 due to the adoption of social networks and microblogging sites like Twitter that will continue to cut into the use of portals,” Mastin says.
The economic downturn has forced both corporations and consumers to change their buying habits.
Ashok Kumar, analyst at Collins Stewart, notes that businesses are extending the life cycles of their PCs from three years to four years or more.
Consumers, meanwhile, are looking to lower-cost units, which will affect already squeezed gross margins. For those reasons, Kumar doesn’t expect the PC sector to recover until 2010.
“If you look at the notebook category, which until recently has been the primary area of strength, we expect almost all of the growth in notebooks in 2009 to be in the netbook category, which have a sub-$500 SKU,” Kumar says. “The combination of unit shrinkage and a mix shift will cause industry revenues to decline up to 10 percent.”
Kumar says Hewlett-Packard is in a good position, simply because it can offset a slowdown in hardware sales with services and software. But things don’t look quite as good for Dell.
“On the consumer front, Dell is in a losing war against Apple,” Kumar says. “On the corporate front, they’re heavily exposed to the weakness in North America. It’s a no-win situation, so Dell will clearly end up being a loser.”
Networking, Security, Games
With Internet traffic growth rates beginning to moderate, coupled with slower demand as corporations tighten cut their budgets, networking companies will have a tough time in 2009. But companies that have a hand in network security may find that demand for their offerings will continue to grow.
“Cisco is struggling with market share erosion because a number of their products seem to be getting a little dated,” says ErikSuppiger, analyst at Signal Hill Group. “Juniper [Networks] , with its high-end routing products, is performing well and probably taking some market share from Cisco.”
Despite a tough economic climate, Suppiger says the need for data security will continue to grow, particularly as companies deal with the threat of cyber attacks that stem from social networking sites.
“It’s difficult to control corporate access to things like social networks because the content changes dynamically and it’s hard to filter,” Suppiger says. “There’s a lot of opportunities for malware to be embedded into the content on those Web sites.”
Demand for security is also driven by new compliance standards that require companies to show their data networks meet certain security requirements, such as the Payment Card Industry Data Security Standard,PCI DSS.
“If your auditors say you need this [technology] to meet compliance, that money will be found even in tight budget environments,” Suppiger says.
Suppiger lists Juniper Networks, Blue Coat Systems, and Websense  as companies that can benefit from increased demand for network security.
The video game sector is often viewed as a shelter from the storm during an economic slowdown, but from an investment point of view, 2009 will be a mixed bag, according to Todd Mitchell, analyst at Kaufman Brothers.
That’s largely becauseis taking market share from the other major players, leaving Electronic Arts, Activision Blizzard , THQ, and Take-Two Interactive with smaller pieces of the pie. The biggest problem facing these companies? Too many products.
“Not everybody can have a hit in every genre in their lineup,” Mitchell says. “It’s more dire for THQ. They’ve got too many games and they need to get rid of the marginal ones.”
Although growth rates are expected to slow, 2009 should be a positive year for the industry.
“I think people are looking for 5- to 10-percent growth next year,” Mitchell says. “I think we’ll come in slightly lower than the 20 percent expected this year, but you come in at the high end of next year’s range because you’re starting from a smaller base.”
None of the analysts interviewed for this article own shares in the companies commented on. Piper Jaffray makes a market in the securities of Nokia, Research in Motion, and Motorola.
Signal Hill Group makes a market in the securities of Cisco Systems, Juniper Networks, and Blue Coat Systems.
Collins Stewart makes a market in Dell and expects to receive, or intends to seek, compensation for investment banking services from Dell in the next three months.
William Blair & Co. makes a market in the securities of Google and Yahoo, and expects to receive, or intends to seek, compensation for investment banking services from Google in the next three months.
Kaufman Brothers makes a market in the securities of Electronic Arts, Take-Two Interactive, THQ, and Activision Blizzard.