Email | Print    Type Size  -  +

Tech teeters on the brink of a recession

Six weeks of crisis have investors painting a bleak picture of the sector's future.

By Scott Moritz, writer
Last Updated: October 24, 2008: 5:21 PM ET

NEW YORK (Fortune) -- The tech sector took another beating Friday as fears of a global recession fed a widespread market selloff.

The pervasive selling mood has intesified this week after a string of third quarter earnings announcements. Citing concerns about the ailing economy and a sudden slump in orders, several big players offered bleak sales outlooks and lowered their financial targets.

A bout of panic selling overseas early Friday threatened to take hold in the U.S. markets. But tech stocks closed only moderately down, recovering a bit from their steeper drop at the opening. The Nasdaq ended down 3%, with tech giants Microsoft (MSFT, Fortune 500) up 1%, Apple (AAPL, Fortune 500)down 3% and Cisco (CSCO, Fortune 500) off 4%, while some names like Research in Motion (RIMM) fell 2% and Yahoo (YHOO, Fortune 500) fell 3%.

Even diehard tech optimists have been hitting the exits over the past six weeks following the collapse of Lehman Brothers and intensified the subsequent meltdown of major financial firms. The Dow has fallen 27% since Lehman went bust, but the tech-heavy Nasdaq has dropped even more-a total of 32%-as investors concluded that the financial crisis would lead to a global slowdown in the "real" economy.

Amid that climate of fear, several big tech companies have closed their books on the third quarter and reevaluated the outlook for business ahead.

Some of the grim harbingers:

  • Amazon (AMZN, Fortune 500) saw a troubling dip in big-ticket purchases and slashed its fourth-quarter sales target 7% below expectations.
  • Chip giant Texas Instruments saw orders drop at a time when they historically have seen a pre-holiday boost, and slashed its fourth-quarter sales outlook 13% below third-quarter levels.
  • Intel saw weak chip demand from both corporate and consumer markets and warned that sales could drop sequentially in the fourth quarter, an event the company has not seen since the last tech crash in late 2000.
  • Even hothanded Apple called for December-quarter sales in the range of $9.5 billion, roughly flat with last year's level.
  • Despite a solid September quarter, Microsoft cut its current-quarter sales guidance Thursday by about 3% on caution of a mild-to-deep recession ahead.

Forecasting December sales in October is always challenging, because many tech shops are experiencing the lull that comes just before the crucial holiday sales rush. This year visibility is even lower than usual, given the ominous signs that any recession could be long and deep.

Morgan Keegan analyst Tavis McCourt, who covers Apple and Research in Motion, two of the biggest growth engines in the sector, says he's convinced that the downward momentum is just starting.

"What we are seeing is part of a bigger slide," says McCourt. "You won't find many companies growing earnings next year. It will be a full-blown recession. If you asked me a month ago, I wouldn't have said this."

Making adjustments

Tech's recovery hinges on the buying power of consumers and large businesses. Declining home values and rising unemployment have put consumers under pressure. And drooping sales in a tough credit market haven't exactly encouraged businesses to beef up IT spending.

These conditions will likely stay will us for a couple years, says McCourt.

The signs have been clear enough to put some outfits like Texas Instruments into action.

"Where ordinarily you'd be seeing a building demand for the holiday season, we in fact had a slowing demand," TI CEO Richard Templeton said on an earnings conference call Monday. That pattern has "held through the first 20 days of October," he said.

Templeton told analysts, "we very simply believe it's not a time to be waiting for perfect data. It's a time to be acting and continuing to be diligent on this." The company made plans to reduce inventory and make cuts in some of its wireless chip business.

Just like in any downturn, companies such as TI will attempt to lower costs in step with falling revenue. It's a painful period of adjustment obviously, but not entirely without a silver lining, says McCourt.

It's possible that "2009 could be a trough" where stocks hit a bottom and start to rally ahead of a recovery, McCourt says.

But given how hard it is to predict the severity of the downturn, pegging the timing of the recovery could prove even harder to get right.  To top of page

More Galleries