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IT spending could boost
tumultuous tech stocksMany businesses are expected
to upgrade their equipment
as the economy recovers
NEW YORK >> When Advanced Micro Devices announced its fourth-quarter earnings earlier this week, the semiconductor company posted its first profit in two years, reported near-record sales and topped Wall Street expectations by an impressive 8 cents per share.
The stock went from $17.38 on Tuesday, right before the company released the good news, down to $15.32 at the close of business yesterday. The cause: a tepid outlook for the first quarter, a seasonally low quarter for chip makers.
After a year of strong gains in technology -- and especially in the semiconductors that power personal computers and a variety of other electronic gadgets -- investors feel stocks like AMD and rival Intel Corp. are overvalued. They're also facing corporate outlooks that appear bland for at least the first quarter of the year.
Yet there's still hope. As the rest of the economy recovers, many businesses will begin upgrading their older technologies, some of which are left over from the Y2K scare and are overdue for replacement. That means more workstations, more laptops, more phones -- and more semiconductors.
According to Barbara Gomolski, an analyst with the technology think tank Gartner, spending on information technology could rise about 5 percent in the coming year. While not a huge jump, it represents the first overall increase in IT spending in two years.
"The trend line is moving up, and that's good news," Gomolski said. "You're starting to see some replacement spending that had been postponed for a few years."
Spending on the so-called "big iron" of IT -- large servers that manage networks and Web sites -- is still likely to be flat, but smaller items such as handheld computers and laptops are high up on the shopping list for many companies.
"Once there's greater confidence that this recovery is sustainable, you can expect corporate America to spend more significantly on IT, and in greater amounts," said Eric Gomberg, senior semiconductor analyst at Thomas Weisel Partners. "That will eventually impact semiconductor companies."
Semiconductors led the trend of higher technology stock prices in 2003. Chip stocks were up 76 percent last year, compared to a 50 percent rise in the overall tech-heavy Nasdaq composite index. According to a recent report from Standard & Poor's, there's still room for 20 percent to 25 percent growth in semiconductor stocks this year, thanks in part to the increasing IT spending.
In the short term, post-earnings season could be a good time to buy, especially after the semiconductor sell-off of the past few weeks prompted by the mediocre earnings forecasts issued by Intel and other chip makers.
Intel closed yesterday at $31.75, down from $33.39 right before it released earnings Jan. 14. Memory chip maker SanDisk Corp. fell from $72.45 on Tuesday, when it announced earnings, to $59.78 at yesterday's close. The company beat Wall Street estimates by 15 cents, but issued a disappointing first-quarter outlook.
Even nVidia Corp., the computer video chip manufacturer due to announce earnings Feb. 9, fell from $25.35 at the start of the week to $23.09 yesterday as the market drove semiconductors lower.
SanDisk and other memory chip makers have a strong upside, Gomolski said, because of their use in products for the corporate market as well as in-demand flash memory cards for consumer electronics. But because of the lengthy manufacturing time required for any semiconductor, growth will come slowly.
"Semis are not for the risk-adverse," Gomberg warned. "There's going to be continued volatility for a while. But as things pick up toward the latter half of the year, supply and demand will take over and you'll see some improvements."
As long as investors can ride out the first quarter, that is.
For the week, the Dow Jones industrial average was down 32.22, or 0.3 percent, at 10,568.29. The Nasdaq lost 16.59, or 0.8 percent, to close the week at 2,123.87. The S&P 500 rose 1.72, or 0.2 percent, to 1,141.55. The Russell 2000 index of smaller companies rose 5.73, or 7 percent during the week, to 596.14.
The Wilshire 5000 Total Market Index -- a capitalization-weighted index that measures more than 5,200 U.S. based companies-- ended the week at 11,156.79, up 40.75 percent from last week. A year ago the index was 8,175.75.
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