Investors have proved all too ready to interpret positive earnings trends from Intel, IBM and Apple as signs of economic recovery and to justify a continued rally in technology stocks.
Now they are taking the wrong lessons in reverse by reading disappointing results from Microsoft as evidence that a nascent rebound in the economy has stalled. By the same token, it is mistaken to read the best quarterly results in two-and-a-half years for Samsung Electronics, the world's biggest maker of memory chips, as any indicator of progress on the economic front.
Look past the headlines and you will find factors specific to each of these companies that say little about any fresh demand for technology in this economy.
The truth is that technology companies have done a terrific job of cutting costs and preserving cash flow, even as revenue growth has continued to shrivel or turn negative. But demand for new products and services remains scarce, except in isolated pockets. Apple and BlackBerry-maker Research in Motion make must-have gadgets that resist economic penny-pinching.
Remember why investors put up with the volatility of technology stocks in the first place? Winners in the sector are famous for generating outsized growth for hot products or services independent of economic cycles.
Microsoft's fiscal year-end results reflect the dynamics of the company's own product cycles as much as the economy. The company reported its first-ever drop in annual sales of Windows software as overall revenue fell by 17 per cent.
But the world's largest software maker is on the cusp of a major upturn in its business that is expected to follow the introduction of the next version of its operating system, Windows 7 in October. It is natural, then, that business and consumer buyers might pause until Windows 7 gives them new reason to buy PCs in 2010 and beyond.
Sure, the company blamed a poor macroeconomic climate. But Microsoft has been saying much the same thing for the past year, namely, that an "economic reset" to lower levels of growth is under way in the world.
Meanwhile, Samsung's quarterly results out Friday showed it benefiting from a recovery in memory chip pricing that is only indirectly related to underlying economic demand. Firming pricing in memories followed a two-year industry slump created by a glut of over production. Again, no signs of economic uptick here.
Samsung, which is also the world's second-largest maker of mobile phones, is enjoying robust demand for these products thanks to clever designs. These are stealing market share from rival mid-priced phones. The gains are coming in spite of an expected 10 per cent drop in international mobile phone demand this year.
Furthermore, the positive results earlier this month from Intel and IBM said less about the economy than they did about the success of specific turnaround strategies the companies have put in place over the years.
IBM has sharply raised its 2009 year earnings outlook as it has refocused on higher-margin software and services businesses instead of hardware. This success is a product of financial reengineering and cost-cutting, not improving demand.
Note that IBM revenue is set to fall nine per cent in the course of 2009.
Windows 7 may not boost microsoft growth
Microsoft showed weakness across all its business units, analysts said, and questioned whether the much-anticipated launch of Windows 7 operating system could reignite growth later this year.
Microsoft shares plunged eight per cent on Friday, as its weaker-than-expected results contradicted Wall Street's belief that the worst is over for the technology sector.
The drop shaved about $19 billion (Dh70bn) off Microsoft's market value and it was the world number one software maker's biggest single-day fall since January 2009, when its quarterly results had also missed expectations.
"While there are market indications that the demand for PCs and servers is beginning to stabilise, we do not anticipate a snapback in demand, despite the Windows 7 October launch, until 2010," said Israel Hernandez, an analyst at Barclays Capital.
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