Morgan Stanley: Technology Stocks Losing Momentum

Jul.28, 2008 in Market Outlook

Last Update: 7/28/2008 8:48:31 AM

By Ed Welsch
Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)–Technology stocks will likely underperform as overly
optimistic earnings expectations are reconciled with a slowing global economy,
Morgan Stanley told clients Monday.

The firm said that the technology sector’s momentum seemed to be slowing as some
of its flagship names have either missed their second-quarter earnings
expectations or lowered their forecasts after reporting, including Google Inc.
(GOOG), Apple Inc. (AAPL), SanDisk Corp. (SNDK) and Texas Instruments Inc. (TXN).

Along with the energy sector, technology has been one of the strongest earnings
performers through the downturn. Half the sector has finished reporting
second-quarter earnings, which showed earnings growth of 15% - the second-highest
rate of earnings growth after the energy sector, according to data provided by
Thomson Reuters. Technology earnings have grown an average of 16% over the last
four quarters.

But Morgan Stanley believes Wall Street may be too optimistic about the
technology sector’s ability to keep producing that rate of strong earnings
growth.

The firm said that while companies most exposed to consumer spending have fared
the worst so far, the greatest potential disappointment is in business hardware,
as corporate profits weaken and information-technology budgets come under
pressure.

It also expressed caution on Internet companies such as Yahoo Inc. (YHOO), eBay
Inc. (EBAY) and Google, saying the stocks are not cheap and the companies may not
be as immune to a consumer slowdown as investors think.

Software and IT services would likely perform the best, the firm says, due to
their high-margin recurring revenue and strong growth outlooks.

On Thursday, Paris-based investment bank Societe Generale also raised a warning
flag on the technology sector when it advised investors to sell shares of
technology giants International Business Machines Corp. (IBM) and Oracle Corp.
(ORCL), saying years of outperformance in their shares were about to end as the
global economy cools.

Did you like this? If so, please bookmark it,