Riding the Tech Rebound

11/19/2009 11:30 am EST

Focus: STOCKS

Tobin Smith

Founder and Chief Research Analyst, NBT Equity Group

Tobin Smith and Joshua Levine of ChangeWave Research report signs of revival in corporate technology purchases, and mention one tech giant this should help.

Our confidence is reinforced by the 90-day spending outlook for corporate software. It's the best we've seen in two years and is occurring across most major software categories.

A total of 16% of respondents [to our ChangeWave Alliance survey] said their company would spend more on software during the next 90 days—four points better than the previous survey in July. Just 18% said they would spend less—also a four-point improvement. Corporations are more willing to spend on what is, in fact, largely discretionary for them.

Clearly, the outlook for corporate software buying is improving. Another bit of evidence for a tech rebound is the IDC report showing that worldwide PC processor shipments in [the third quarter of] 2009 rose by an all-time record level for a single quarter. PC processor unit shipments in the quarter increased 23% compared to [the second quarter], and double the typical growth in unit shipments for the period.

PC processor [revenues] grew more than 14% during the quarter to $7.4 billion. Mobile PC processors continued to drive growth as they increased 35.7% in [the third quarter], sequentially, while desktop PC processors grew 11.4% for the quarter and x86 server processors grew 12.2% for the quarter.

That's further confirmation that confidence is building about a return to sustainable economic growth.

Several [recent] government, industry, and corporate reports reinforced the growth scenario—starting with a boost in US productivity numbers that came about as a result of corporations squeezing more output from hourly employees.

Worker productivity jumped at a 9.5% annual rate in Q3 — the fastest pace in six years — while labor costs fell and unemployment claims were lower than forecast. These results point to increased business investment and higher employment in the coming months.

Cisco Systems (Nasdaq: CSCO) forecast better-than-expected revenue for the current quarter—a good sign that a recovery is under way for the technology sector.

Cisco expects revenue to grow 1% to 4% in [the fiscal second quarter,] which ends in January. This translates into sales of $9.2 billion to $9.5 billion, while the consensus on the Street expects sales of $9 billion. However, Cisco did caution that the pace of order improvement is still slow, and there is continuing uncertainty about the economy.

Cisco chief executive officer John Chambers, who at times sounded giddy on the quarterly conference call, said that last quarter (fiscal fourth quarter) marked the tipping point and the company is starting to see the economic recovery gain momentum. He was especially pleased with the US improvement.

Given Cisco's belief that the market is beginning to accelerate, hirings will be very targeted with focus on productivity improvements and movement into new market segments such as the smart grid. (The stock closed at around $24 Wednesday—Editor.)

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