Analysts Skeptical About Big Tech Surge

SAN FRANCISCO —  Even as technology stocks scored huge gains Wednesday, analysts remained skeptical that Wall Street’s enthusiasm reflects a near-term recovery for the sluggish tech sector.

“It’s a moment of irrational anticipation,” said Ken McGee, an analyst with Gartner Inc., which surveys 10,000 large technology buyers.

The market bounce, spurred by a favorable earnings report Tuesday from Cisco Systems Inc., “totally discounts IBM’s announcement about the absence of demand,” he said. “We’re not seeing systematic demand backing up the exuberance of Cisco’s numbers.”

IBM Corp.’s chief executive, Sam Palmisano, told employees late last month that the market for technology products and services would remain weak until sometime next year, according to an investor newsletter and news reports.

Given slack demand and downward pricing pressures, Ashok Kumar, a technology analyst with U.S. Bancorp Piper Jaffray, said Wednesday, “This year is a complete write-off....We don’t see any meaningful recovery before 2003.”

But investors hungering for good tech news seemed to find it in network-equipment bellwether Cisco, which reported earnings of 10 cents a share, slightly higher than the average forecast of analysts polled by Thomson Financial/First Call.

Large companies “are starting to buy technology again, albeit slowly,” said Harry Fenik, an analyst with Segaza Group. Cisco and other giant tech suppliers finally are reducing their inventory backlogs.

Cisco’s revenue of $4.8 billion was a scant 2% above the $4.7 billion logged during the disastrous quarter a year earlier, when the company lost $2.7 billion, or 37 cents a share. The profit was squeezed from cost-cutting moves.

Cisco CEO John Chambers expressed cautious optimism about Cisco’s business prospects in the current quarter but pointedly refused to project a general recovery in technology.

Kumar said that if Cisco is experiencing such modest growth, the industry can’t be expected to do much better.

“Cisco [alone] represents 65% to 70% of the market cap of the whole telco-equipment space,” Kumar said. “So how much headroom can there be for growth?”

Still, investors took Chambers’ remarks as a signal that a recovery is near--and jumped whole hog into technology stocks Wednesday.

Shares in San Jose-based Cisco leaped $3.19, or more than 24%, to close at $16.27 in Nasdaq trading.

Most other major tech companies followed close behind. Also on Nasdaq, database software giant Oracle Corp. jumped 90 cents, or nearly 11%, to $9.15--shaking off both a slack software market and the company’s involvement in a software-contract scandal with the state of California.

Internet leader Yahoo Inc. rose $1.58, or about 11%, to close at $16.32, and microprocessor titan Intel Corp. rose $2.83, also about 11%, to $28.98. Both trade on Nasdaq.

Microsoft Corp. shares surged $5.50 to close at $54.97, also on Nasdaq. Part of that rise was attributed to the firm’s announcement that sales of its Xbox game console had improved in Europe.

Kumar called that justification “worse than clinging to a straw,” because European Xbox sales account for just a sliver of the software giant’s revenue.

Analysts said investors may finally have shaken their protracted cynicism about the tech recovery, jumping onto what they hope will be the ground floor of a new bull market.

Many may be disappointed within a few days, Kumar predicted.

More than a year of reduced purchases by large firms has depressed prices in PCs, servers (more powerful computers that manage networks) and network equipment, among other categories--suggesting that even as the recovery slowly takes hold, profit growth will lag.

Analysts attributed part of the tech malaise to the bursting of the Internet bubble and the steep drop in buying by corporations that had binged on new equipment to avoid trouble with the year-2000 software bug.

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The Cisco Effect

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