Wall Street: Tech more valuable than oil

Tech industry wary of another downturn, as Apple changes market

The tech industry's answer to this week's stock market roller coaster was delivered on Tuesday by the mighty Apple Inc.

Apple saw its stock price rise enough -- gaining more than 5% -- to briefly surpass Exxon Mobil as the most valuable company in the U.S., according to an Associated Press analysis of its market cap. (Exxon Mobile wound up the day slightly ahead of Apple.)

Most of the other major tech companies -- including Intel, IBM, Dell, Microsoft and Hewlett-Packard -- all finished in positive territory yesterday, as markets made up ground lost in the big sell-off on Monday that also hit oil prices and other commodities.

Yesterday's rally may be all that's needed to shake away, at least temporarily, some of the economic concerns the IT industry still faces. By closing in on Exxon, Apple effectively affirmed that there are few limits to tech growth.

But more immediate trends are worrisome. Recent events, including debt problems in Europe, the U.S. credit rating drop and earlier market losses, have begun to raise fears that consumers may retreat and CIOs might start cutting IT budgets.

"Until last week, there was really no worry of a downturn in tech, at least not here in Silicon Valley, which has been very healthy this year," said Charles Wuischpard, CEO of Penguin Computing, a privately held HPC firm that has had a good year so far.

"I think it is too early to say whether there will be a sustained impact, but certainly in the short term, we are naturally more cautious about hiring and spending until we have better visibility into the trend," said Wuischpard. "And that's the danger, really -- that everyone shifts into a cautious position and the threat becomes the reality."

Trends in some areas of tech, such as initial public offerings (IPO), are nowhere near as bad as they were three year ago.

In early 2008, one sign of a troubled economy was the drying up of the IPO market. By the time Lehman Brothers collapsed, just six venture-backed IPOs had occurred that year.

In the first half of this year, there have been 36.

"This is not 2008, for sure," said Mark Jensen, a partner at Deloitte & Touche LLP and national managing partner for venture capital services. "The economy has been improving, [though] not as fast as people might like."

Though economic conditions are more solid than in 2008, Jensen remains concerned that market turmoil will have the same kind of impact as three years ago. "The uncertainty just starts to bring everything to a halt," he said.

Andrew Bartels, an analyst at Forrester, still believes the odds favor "really weak but still positive growth" in the tech sector.

But if CIOs start cutting, they will follow the steps used in the past: First, cancel purchases of computer equipment, and then look at what projects can be deferred. Contractors might get cut, contracts renegotiated and -- if it gets that far -- layoffs, said Bartels.

The impact of the 2008-2009 recession on hardware spending, in particular, was pronounced.

In 2008, 2.87 million servers were shipped in the U.S., a decline of 3% from the prior year. In 2009, server shipments fell 15% to 2.45 million. Last year, they jumped to 2.95 million, a 20% increase from the previous year, according to IDC figures.

If there's another downturn, it could look similar to 2008, when the industry saw a sharp decline in hardware spending, said Stephen Minton, an analyst at IDC.

Even so, he doesn't see that happening at this point. "There is nothing that is really happening to change the fundamental drivers of IT spending," said Minton.

Ken McGee, an analyst at Gartner, said his firm continues to advise corporations and the public sector to prepare a second budget that considers the impact of another recession or changes in the cost of financing. "It would be unwise to walk into 2012 with just one budget," he said.

One gathering storm in tech spending will be the effect of budget cuts by Congress.

"Government spending is going to drop like a rock," said Rob Enderle, an analyst at Enderle Associates. "While I doubt we will see a massive set of layoffs across the sector, we will likely see adjustments in firms who have the government and military as primary customers or have as primary customers the same firms."

Patrick Thibodeau covers SaaS and enterprise applications, outsourcing, government IT policies, data centers and IT workforce issues for Computerworld. Follow Patrick on Twitter at @DCgov or subscribe to Patrick's RSS feed . His e-mail address is pthibodeau@computerworld.com.

FREE Computerworld Insider Guide: IT Certification Study Tips
Join the discussion
Be the first to comment on this article. Our Commenting Policies