Tech to Ride an Upgrade Cycle
By David LaGesse, US News & World Report
Posted Sunday, January 7, 2007
Tech companies anxiously hope the hangover will finally be over in 2007. Since the Internet party ended painfully in 2000, technology stocks have lagged behind the market, making for a down cycle lasting so long that it alone would suggest an up cycle is due. But the coming year also means new products that could help reignite profits and investor enthusiasm.
First up is Microsoft's release of major new versions of its core products-Windows Vista and Office 2007. Updates to Windows, in particular, can spread cheer across the tech sector, as users buy new or updated hardware to handle the software. That could benefit PC makers like Dell and HP, as well as semiconductor companies, including microprocessor firms like Intel and Advanced Micro Devices and memory chipmakers like Micron. The question is how much-or how quickly-since corporations hesitate to make the leap to a new system until it has proved stable. "The adoption rate will be the thing to watch," says Chris McHugh of Turner Investment Partners.
In the short run, he's more enthusiastic about new products in telecommunications, including cable TV services from telcos and telephone service from cable companies. "That competition is forcing them to upgrade their equipment," McHugh says. And that will benefit suppliers that were well known during the Internet bubble like Cisco and Juniper Networks, and newer players like F5 Networks that help online applications run more smoothly.
Spending spree? It all adds up to higher technology spending, with tech earnings forecast to grow 21 percent this year, the highest of any sector, according to Thomson Financial. But there is still reason to be cautious-corporate technology chiefs themselves predict a slowing in tech spending this year, according to a survey by CIO Magazine. That's likely because of slackening growth in corporate profits, which in turn cuts into the growth in tech budgets, says Ed Yardeni of Oak Associates. Yes, spending on hardware appears on the rise, but it's harder to pick specific winners, he says: "It's not like the late '90s, when you could buy almost anything and do well." Investing in tech still favors the tough stomach of a trader, rather than a long-term investor, Yardeni says.
Growth investors should watch for the next hot feature getting swept into established products, much as cameras became popular in cellphones, says Kevin Landis of Firsthand Funds. Next up in cellphones? Landis has invested in companies like SiRF Technology, which makes GPS chips, and AuthenTec, whose success in biometric sensors like fingerprint readers could lead to an initial public offering soon. Their products are emblematic of technology innovations, which should accelerate as the sector enjoys a rebound. "This year, it's tech's turn," Landis says. |
