Tech bust fears persist despite HP earnings surprise

Hewlett-Packard shares soared 14% Tuesday, leading a tech sector rally, after the No. 1 PC-maker announced better-than-expected earnings six days early.

But technology analysts warned that the industry still might be slipping into its worst downturn since the dotcom bust of 2001. "Things are tough out there," says equity analyst Brent Bracelin with Pacific Crest Securities. HP's results "were not as bad as feared…(but) this certainly isn't anything to jump up and down about."

HP HPQ reported revenue of $33.6 billion in the quarter ended Oct. 31, a 19% increase from a year ago. But much of the gain came from its recent acquisition of consulting giant Electronic Data Systems. Growth of existing businesses was closer to 5%.

In the current fiscal year, HP expects revenue from $127.5 billion to $130 billion, which is also a healthy gain. Most of the gain comes from EDS, Bracelin says. The numbers imply that HP's core business — PCs, printers, and other computer hardware and software — will decline 5 to 7% next year, he says.

But it could be worse. HP's worldwide reach, broad product line, and ability to gain market share makes it better able to weather the storm than other tech companies, says tech analyst Stephen Baker with researcher NPD. More troubling signs are everywhere.

Cisco, Intel and Sun are among big tech suppliers who have trimmed revenue and earnings projections for the coming year in anticipation of major cuts in corporate spending on tech infrastructure.

What's more, Circuit City's bankruptcy and recent cautionary guidance by Best Buy signal that the coming holiday shopping season could be a brutal one for makers of high-tech gadgetry aimed at the consumer market, says Charles King, principal analyst at IT Pund Research.

Fearing the worst

How bad could it get? Nowhere near as bad as 2001, according to three major tech research firms.

Gartner and IDC both recently projected worst case scenarios of slightly less that 3% growth rate in global tech spending for 2009, down from earlier estimates of about 6% growth.

ISI is a bit more bearish. "My view is that tech cannot fight the downward tug of economic gravity," says Bill Whyman, head of ISI's tech strategy research group. He predicts 2009 growth in global tech spending in the "mid-single digit negative." Historical evidence shows that business and consumer tech spending always go negative in recessions, he says.

"Computer hardware spending falls the most but is the first to bounce back," says Whyman. "Software spending is the most stable, and communication equipment spending often lags the recovery."

But some troubled companies may be unable to weather the downturn, says IDC tech analyst Richard Shim. Although unit sales of many tech products are expected to remain steady, prices are expected to plummet — especially for some consumer goods. "The guys who are weak are going to get nailed," he says. "There is nothing on the horizon that they can use as a lifesaver."

A wave of tech consolidation may be the result, Shim says. HP's EDS acquisition may be an early sign. So might Microsoft's attempt to buy search giant Yahoo earlier this year. Yahoo CEO Jerry Yang, who was widely criticized for not closing the Microsoft deal, said Monday that he plans to relinquish his post. (He will remain with the company he co-founded in a supporting role.)

Pockets of growth

In an attempt to stoke the most stable part of the tech market, Microsoft last week, borrowed a page from the beleaguered auto industry. The software giant is offering zero percent financing for its "enterprise resource planning" and "customer relationship management" business systems.

"We are working closely with our customers to proactively enable them to preserve their capital resources to ride out the current economic situation," says Kirill Tatarinov, vice president of Microsoft Business Solutions.

Microsoft is very likely to find more than a few takers, says Rebecca Wettemann, vice president of research at Nucleus Research.

That's because businesses are hunkering down and looking for low cost, flexible business systems that can help them boost customer loyalty. "Now is when I most want to keep my customers because it's much harder to get new ones," says Wettemann.

Hosted business applications — think and Net Suite — should do well in a downturn, as should business analytics systems that model customer behavior, says Wettemann.

Virtualization programs that boost the usability of computer servers should do well, says King. And demand for data storage systems should also remain firm "because even in hard times companies will continue to create, store and archive information," he says.

Another recession resistant tech segment: video games. The U.S. video game market grew a robust 18% in October, compared to the year earlier month, and appears to be on track for a record year, according to NPD Group. Video games "are like comfort food," says Wettemann. "People getting laid off need something to do."