Strong IT spending overseas, especially in emerging markets, has helped certain tech giants outperform other, more consumer-focused tech companies. But if that spigot begins to slow to a trickle, those multinationals could start to see their orders dry up, leading to pressure on their share prices and financial results.
"Right now, the overall picture in the global economy is one of tightening," said Quincy Krosby, chief investment strategist at investment and insurance firm The Hartford. "When you have tightening, the business environment slows down. The question is by how much."
To be sure, Dell isn't considered a perfect proxy for tech multinationals because it isn't as diversified as companies such as International Business Machines (IBM) and Hewlett-Packard, which did raise similar concerns about slowing overseas spending on its earnings call last month.
Seagate Technology Chief Executive Bill Watkins says it might be a matter of perception.
"End-demand is probably a little better than we think," Watkins said. "A lot of companies are worried about visibility (going into the fourth quarter).
"It's more of a fear factor."
IT spending is still expected to grow 8% to $3.4 trillion this year, according to research firm Gartner. But much of that growth will come from emerging markets.
Krosby said the upcoming pre-announcements and quarterly reports will be a crucial indicator of the technology spending environment for the coming months.
Tuesday, Dell kicked it off by warning that the weakness in North America was spreading overseas faster. This follows earlier comments that it was experiencing headwinds from Europe.
But other signs point to a broader slowdown. Crude oil prices, a widely viewed indication of global industrial production, continued to fall, slipping $4.50 to $91.21, compared with its peak in July of around $147.
Such weakness could take its toll on companies that have previously held up well on the belief that overseas markets would continue to pick up the slack. IBM shares are up 7% for the year, while H-P is down only 5% and Cisco Systems is off 17%.
In contrast, more consumer- and U.S.-focused companies have fared worse. Google has lost 37% for the year and Apple is down 32%. In addition, the Morgan Stanley Tech Index and the S&P 500 have each fallen more than 18% in 2008.
Looking To Contracts
More specific to the quarterly results, Krosby said she will be looking at the
companies' comments on the state of their long-term contracts, particularly
overseas. She will be watching for signs that the contracts are being delayed or
canceled outright.
Any hint of a hiccup in the contracts portend poorly for the IT spending environment, she said.
"It means that one more sector that could have been a safe haven is jeopardized," she said.
A similar situation arose in technology in 2000, she said. In the fall of that year, technology companies began warning of canceled orders, quickly leading to a downturn. Instead of re-upping, companies opted to keep their existing IT infrastructure longer.
Forrester projects a further slowdown in U.S. spending next year. Tuesday, the research firm cut its 2009 spending growth projection to 6.1% from 10%.
The larger technology companies are still considered safe in that they won't go out of business, notes Zeus Kerravala, an analyst at research firm Yankee Group. But with the problems in Europe worsening, he doesn't expect much growth.
Indeed, Gartner analyst Jim Tully said he sees IT spending taking a bigger hit - particularly in the developed markets - over the next two years.
Growth Pockets Remain
Despite the decline in technology shares Monday, not everyone is convinced that
the major companies will feel the full brunt of the slowdown.
Some believe Dell's warning is more company-specific because it lacks a significant enough presence overseas to be used as a gauge for global IT spending. Shaw Wu, an analyst at American Technology, said he believes companies such as H-P are better prepared to face the slowdowns than Dell because it has a wider reach.
Tully, meanwhile, said that the Middle East and Africa still remain sources of growth, in addition to traditional emerging market powerhouses such as Brazil and China.
Despite Dell's comments, Europe IT spending is holding up relatively well, Tully said.
While PCs and servers are doing poorly, software and services are still looking good for the year, he said.
That's a good sign for Microsoft and IBM.
-By Roger Cheng, Dow Jones Newswires; 201-938-2020; roger.cheng@dowjones.com
(Jerry DiColo contributed to this report.)
(END) Dow Jones Newswires
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