Tech markets: down but not out

29-02-2008

by Emmet Ryan

IT stocks have taken a beating in recent weeks, but is the market overreacting?

It's been a horrid start to the year for everyone. The weather's been miserable, there's not a whole lot on TV worth watching and the stock markets have taken a beating. Still, all this doom and gloom won't last forever. The days aren't quite so cold anymore and the Hollywood writers strike is over, so that just leaves the markets.

There's a Zen-like quality to the markets. All sectors, all industries, everything is connected, so it's hardly surprising when the reach of the current economic crisis extends into tech stocks.

Globally the picture hasn't been pretty. Intel, whose results are often an indicator of tech sector confidence, saw its share price take a beating despite posting record fourth quarter revenues. Google suffered a similar fate when the search engine giant posted its latest quarterly figures which, like Intel, were record results.

In both these cases the results failed to meet analysts' expectations and in the current shaky climate such a performance doesn't go down well. Rather than being a sign of an imminent downturn for either firm, the failure of these giants to meet the high expectations set for them is more likely the result of pressure from within the sector itself. "There's always a certain amount of a competitive dynamic to consider," said Gerry Hennigan, senior equity analyst at Goodbody Stockbrokers.

That's not to say the industry hasn't endured its fair share of bumps of and bruises in recent times but the scale of the problems could well have been overstated.

"The sector itself has been struggling over the past couple of years," said Hennigan. "Most of the US firms do reasonably well. They have a lot of their operations outside of the US, selling to international markets, but they report their earnings in dollars and the current weak dollar is helping them."

In many respects the problems, if they even merit the term, being suffered by Intel and, in particular, Google, are a result of over-achieving. Ever since its debut as a publicly-traded company Google has almost routinely hammered analysts' expectations with record quarters being the norm. Given the cyclical nature of the markets though it was only natural that it would eventually slow down somewhat and yet even in this current dismal climate the search giant is continuing to post record numbers.

The domestic situation is not as reassuring on first glance, however, as the scale of Irish businesses in the technology sector tends to count against them in a squeeze.

"In general Irish tech stocks are fairly small," said Hennigan. "Iona is in the throes of a sales process as it has suffered to maintain market share."

The Dublin-based middleware and web services company did little to ease fears when it posted its latest results in January, which showed decreases in both revenues and profits.

While a high-profile firm like Iona is struggling, the Zen-like nature of the market is benefiting other Irish businesses. Financial software developer Norkom is currently enjoying a good run. The Dublin-based firm, which specialises in compliance related applications, recorded a 53 percent jump in revenue when its latest half-year figures were published.

"Norkom is operating in an environment where its services are in demand. The increased regulatory environment in the financial sector means that banks are forced into buying its software," said Hennigan.

The varying performance of these two businesses typifies the problems caused by a common misconception about technology stocks.

"One of the biggest difficulties is that people assume everybody [in the tech sector] is in the same pot, when in fact these firms are operating in many different markets," said Hennigan.

"You can't have a broad brush approach. You need to look at the businesses in isolation," he said. "You've got to look at the individual markets and their unique dynamics."

Hennigan explained that the competitive forces within individual markets need to be taken into account before passing judgement on Irish tech stocks. "If they're competing against an IBM [like Iona] it's more difficult for small firms," he said.

While shares in Irish IT companies are enjoying mixed fortunes at present, the view from within the sector is one of confidence.

A recent study of executives in European technology firms by Eurocom and Simpson Financial & Technology PR found that over half of them were more confident about the sector now than they were a year ago. "The Irish [firms] are as a confident as their European counterparts, if not more so," said Ronnie Simpson, managing director of Simpson Financial & Technology PR.

This confidence is in part built from a steely resolve these businesses developed following the dotcom crash in 2000. This recent experience has resulted in Irish IT firms having cooler heads about the current crisis. "The tech sector has been through this before. The companies that survived [the dotcom crash] are more resilient," said Simpson.

However, transferring this confidence from those working in the industry to those investing in it may take some time yet.