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The Turning Point

The long awaited recovery in the technology sector started to come out of the fog into reality late last week. Intel and AMD both raised their sales estimates for the forth quarter, based on sales to date and projections. The Intel change amounted to almost 10% or nearly $600 million dollars.

Since September 21, when all stocks hit their lows, the technology sector has been rising steadily and sharply in the absence of really good news. It was obvious that any dip in technology spending after September 11 was made up for in replacing the $3.2 Billion in technology that Ossama bin Laden blew up in New York and Washington.

Once the economy steadied up, it was obvious that dire predictions in the technology sector simply were not coming true. This industry had been in a sharp recession for almost a year and not even bin Laden could make things any worse.

What the Intel news means is pretty simple. They expect to move $600 million more in processors this quarter than they originally predicted. This translates into $100 million more in sales for Dell, Compaq and Hewlett Packard. That's just the resale cost of the processors. Remembering that they are connected to computer systems with various options, the effect will definitely be multiplied.

This means that more parts like hard disks, sound cards, CD-ROM's, DVD drives and the like will be ordered, installed into computers and sold. Quite simply it means that sales already bottomed out and this is the first proof of it.

There remains a long way to go for this industry. By all reports any sales gains thus far is mostly due to consumers. They are buying their first computer, or replacing their old one, or adding to the household because their children have seized their first home computer. Thus far there has been no visible pickup in sales from corporate America. The budget strings have been pulled very tight there due to uncertainty about the economy.

There is still the chance that some use it or lose it corporate spending will hit the sector as IT and other managers realize they have budget dollars left. In many firms, if you don't spend it, you don't get it back next year. Not spending also can lead to future cuts. Why does the graphics department need a budget of $500,000 for computers in 2002. They didn't spend last years allocation. You get the idea.

The first solid evidence in the technology recovery is in. The next sign will be in Intel and AMD actually beating profits estimates when they release earnings next year. We will also watch with interest the PC makers and all those companies building components.

I think it is safe to say the worst is over in this sector. The stock market has been predicting this for months.

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Shmuel Protter
investmenttool.com

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