Tech Woes

Hey, what's up with the tech sector these days?

It first started with IBM's latest results, which seemed to stop the music and end the party for the whole sector.

IBM's Q3 results were no cause to pop the champagne bottle. Commenting on the Q3 results, IBM's CEO, Ginni Rometty said, "We saw a marked slowdown in September in client buying behaviour, and our results also point to the unprecedented pace of change in our industry. While we did not produce the results we expected to achieve, we again performed well in our strategic growth areas — cloud, data and analytic, security, social, and mobile — where we continue to shift our business." IBM reported declines in all markets: America's revenue fell 2%, Europe/Middle East/Africa revenue fell 2%, and Asia-Pacific revenue dropped 9%. Management said revenues in its so-called "growth markets" fell 6%, with Brazil, Russia, India, and China revenues falling 7%.

Shares of IBM were down by about 7.3%, or $13.30 per share, in premarket trading.

But its Rometty's choice of words, “unprecedented pace of change in our industry,” that is probably sending cold shivers up the spine of technology investors and funds heavily weighted towards tech stocks. Reading between the lines this might mean that their corporate clients are delaying upgrades and investment in information technology, due to the uncertain economic environment. Overall revenue has fallen by 4% year-over-year to $22.4 billion. "We are disappointed in our performance," said Rometty.

But IBM's fall in revenue for the tech giant isn't just about an ageing dinosaur that can't swing with the times.

SAP, German based software company, is playing mellow tunes too! SAP SE cut its full-year earnings forecast as software customers move to applications delivered through the Internet, a trend which has brought sweeping changes throughout the technology industry.

The world’s largest maker of business-management software said October 20 that its 2014 operating profit excluding some items will be in a range of 5.6 billion euros ($7.1 billion) to 5.8 billion euros. That compared with an earlier projection for as much as 6 billion euros. Third-quarter profit on that basis rose 4.6 percent to 1.36 billion euros, trailing the 1.37 billion-euro average of estimates compiled by Bloomberg.

“SAP has a sticky, high-margin customer base that’s very cash generative,” said Paul Moran, head of research at Aviate Global in London, before the announcement. As it moves those clients to the cloud, “the uncertainty now is what’s going to happen to margins in the next few years.” The shares had lost 13 percent this year through last week, putting it in the bottom third of performers in Germany's 30-stock DAX Index.

No “wow factor” from Google either. Even google is starting to look shaky. Last week, Google reported slower-than-expected revenue growth during the third quarter.

Investors punished the company with a stock sell-off, and now Google shares are trading at $511.17, well below a 52-week high of $604.83. Analysts have noted that searching for advertising, isn’t growing as fast as it used to. In fact it is hasn’t grown so slowly since six years ago, said one analysts.

However, one bright spot is Hewlett-Packard, although it has had a turbulent ride over the past year. Its share price fell from 40 US dollars per share to12 USD per share two years ago, as sluggish growth in personal computers and technology hardware caused its fundamentals to deteriorate. But the company has made a Stella recovery since then and it shares are trading near the 40 USD per share again.

But look deeper into the results and there isn't much to cheer. Instead of effectively turning its business around by investing in new areas, HP’s recovering profits are largely the result of job cuts and share buybacks. While these have boosted earnings and the stock price, HP is still at risk of falling behind in the technology world. So the company has been relying on buybacks and job cuts to do the “heavy lifting.”

HP was hit hard by its reliance on hardware, including personal computers and printers. It has obviously come a long way back, thanks to significant restructuring, but the company’s turnaround is not yet complete. Recently, HP announced that it would lay off 5,000 workers as part of its planned corporate split into two companies. This brings the total number of job cuts under CEO Meg Whitman to 55,000. So there is a caveat in HP's recovery.

Even Amazon’s (the online retailer) Q3 financial results reported larger losses than anticipated . Maybe their cloud customers are coming back to haunt them. The company's biggest internet plays are on Amazons AWS system .They are all dotcoms with little or no revenue. Amazon's latest quarterly financial report shows that the company posted a much larger loss than expected, but it is also projecting 7 to 18 percent revenue growth over the busiest shopping period of the year. Last week's after-hours share losses wipe more than $15 billion off of Amazon's market value. The stock had already been down 13 percent since Amazon's last quarterly results announcement in July, when it also missed targets.

Remember the days when PC gaming drove new upgrades to computers? When was the last time you upgraded your computer? Consumers are hanging on to their PCs for years longer. There's no need to upgrade. The standard amount of RAM in average PC will do you good for years. Why should corporates upgrade their servers? Unless they crash due to some major hardware failure, there is no innovation here either.

So the free spending ways of the tech sector may be over. What we might be seeing is more than price corrections, due to cyclical investing. Sector saturation and a lack of new innovation that drives consumer demand, albeit in tight market conditions might mean that a tech sector correction could be on the cards.