A Tech Slowdown is Not a Tech Collapse!

Implications: With the overall state of the economy a general slowdown in technology companies is inevitable.  That does not equate to a collapse akin to 2001 or the current Financial Services sector.  Unless something changes only the weak companies will be hurt severely.

Analysis:

The overall economic slowdown will inevitably hit technology companies as well as the mortgage and financial services sector.  The ripple effect from such a major impact on the overall economy cannot be avoided by any major market segment today, including technology.  Many tech companies produce products destined for the consumer market, either directly or through a chain of companies.  As the consumer pulls back it will have an effect.  Also, tech executives are human and exposed to the same media as everyone else.  When the media is full of stories about a slowdown, tech executives naturally will back off from major expenditures, just in case there is a slowdown in their revenues.  This becomes a self-fulfilling prophecy as more tech executives back off and thus essentially create a tech slowdown.

Many things are different today with the technology sector than was the case in 2001, or for that matter the Financial Services sector today.  In 2001 the tech sector had progressed well beyond booming and into Greenspan’s “irrational exuberance”, even worse than has been the case recently in the real estate and mortgage market.  Even the most impossible business plan got funded to the tune of tens of millions of dollars, and much of that money went to the big tech companies, such as Cisco, Oracle and Sun Microsystems.  Consequently, when the collapse came it destroyed a vast array of companies that should never have existed in the first place, but the ripple effect also hit hard at the big companies.  For example, perhaps the biggest competitor Sun Microsystems had in 2002 and 2003 was the used market for Sun equipment as small companies folded and all their equipment hit the gray market.

The fundamentals are generally strong today throughout the technology sector.  Bellwether companies such as IBM, HP, Cisco and Oracle will almost certainly see a slowdown, but unless something changes that will represent no more than a reduction in growth.  These companies today are remarkably strong with massive cash flows and diversified markets.  Oracle, for example, has been widely targeted as an example of a slowdown based on their last quarter’s results.  Cisco has predicted slower growth.  These examples do show a slowdown, but it should not be forgotten that Oracle still had a great quarter by any objective standard.  Cisco is still expecting to grow, even from their current large base.  These companies are not in trouble by any stretch.  They’re simply slowing a bit.

Smaller companies will likely be hit harder than the behemoths mentioned above.  Some will probably fail as a result of the slowdown.  Those which have a solid business plan and are well capitalized will generally weather the storm with minimal impact.  Those running on a shoestring with a marginal business plan will probably go away.  This should be viewed as a correction, not a collapse.  The key for investors in smaller tech companies is not to flee en masse, but rather due diligence is called for.  Just because this is the latest social networking company does not mean it’s a good investment!  Unless there are major problems not visible today coming up, a good investment in tech is still a good investment.