Wall Street: Tech shares slump to 2003 levels

Revenue forecasts cut for tech bellweathers

Analysts are cutting revenue forecasts for bellwether IT vendors as the US financial sector crisis caused markets around the world to tumble again this week, pushing the tech-heavy Nasdaq down to 2003 levels as shares of companies as varied as Intel and Yahoo skidded to five-year lows.

Even though the US and central banks around the world started to coordinate market-stabilisation tactics such as lowering lending rates, concerns about tightening credit and recession sent the Nasdaq down Thursday by 95.21 points, or 5.47%, to 1645.12. It was the index's lowest point since the third quarter of 2003, right after the trough of the dot-com bust. The Dow, a more general index, plummeted more than 675 points, or 7%, to close at 8579.19.

With hardware sales expected to slow down, Intel hit a five-year low Monday, closing at US$16.93. It continued to slip, hitting US$15.60 at Thursday's close. On Wednesday, Yahoo shares reached US$16.25, a five-year low, on concerns for a weakening display-advertising market. Yahoo closed further down Thursday, at US$12.65.

With the US heading into a second-half recession — considered by many economists as two consecutive quarters of gross domestic product decline — businesses and consumers are expected to curb IT spending.

Citigroup lowered revenue and earnings-per-share estimates for the second half of 2008, as well as financial year 2009 and 2010, for large-cap hardware vendors including IBM, Hewlett-Packard, Dell and Apple. The cuts were made "to reflect the growing impact of the credit crisis as well as unfavorable movements on foreign exchange values," said Richard Gardner in a Citigroup research note Tuesday.

Citigroup also lowered estimates for desktop software and SaaS, on-demand software vendors including Adobe, Autodesk, Salesforce.com, Oracle, Red Hat and Intuit. The lowered estimates this week follow last week's cuts in forecasts for 11 other software companies due to "deteriorating macro conditions, especially hurting the sale of perpetual licences to large enterprises," according to Citigroup's Brent Thill.

SAP on Monday warned that third-quarter revenue would be lower than expected, saying that financial turmoil has led to a drop in orders. SAP shares dropped Monday by US$5.97 to close at US$39.68. They continued to decline throughout the week and closed Thursday at US$34.76.

Recession fears are having a spillover effect on the services sector as well, some analysts noted. "Clients are deferring project decisions, consolidating their vendor relationships, and starting to renegotiate prices with their existing providers," said Forrester analyst Pascal Matzke via email.

Despite the gloom, there were a few rays of light this week. In a preliminary financial report, IBM on Wednesday said that though third-quarter revenue did not increase as much as expected, net income grew 20% to hit US$2.8 billion, with earnings per share up 22% to US$2.05. Analysts surveyed by Thomson Reuters had predicted IBM would report earnings of US$2.02 a share.

Though the services sector is under pressure, analysts noted the upbeat IBM report came on the heels of a positive forecast from Accenture, which two weeks ago issued better-than-expected 2009 guidance.

The IBM report was not enough to save the day Thursday, however, as markets slid further toward the lows of the IT bust earlier in the decade. Even shares of IBM, which during the day got a boost from its report, closed down by US$1.55, to US$89.00, as markets plunged in the afternoon following gloomy reports on the US auto industry from financial analysts.

With tech companies gearing up to report third-quarter earnings over the next few weeks, tech investors should get a clearer picture of how the last quarter of the year will play out. Next week, IBM will give its full report, and Google will issue its earnings statements Thursday.

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