Investor jitters over US technology stocks are unlikely to subside soon amid a mixed outlook for second-quarter earnings, analysts say.
While software earnings may prove to be a bright spot, soft pricing in the personal computer and semiconductor industries and turmoil in Asia are likely to depress hardware profits.
"The main reason for weaker tech earnings is a slowdown in semiconductor earnings, primarily because of Asia and price competition," said Joseph Abbott, research manager at financial research firm I/B/E/S.
Asia's slowdown has exacerbated the effect of moves by PC-makers to match price cuts by companies such as Compaq Computer Corp. (CPQ)
A 13 percent second-quarter earnings drop reported in mid-May by Hewlett-Packard Co. (HWP) showed those problems have yet to abate.
In addition, this week's surge by the dollar to seven-year highs against Japan's yen could put further pressure on tech company revenues in the region when translated back into dollars.
Earnings for computer hardware companies are expected to fall 6 percent in the quarter after a 15 percent first-quarter drop, according to research firm First Call.
"Asia is clearly the biggest factor in overall softening that has left an impact over here," said Chuck Hill, First Call's director of research.
Semiconductor earnings will be hardest hit in the current quarter, analysts said.
"These are the worst of the pack," Abbott said.
I/B/E/S expects year-on-year chip-sector earnings to fall 31 percent in the second quarter after a 25 percent first-quarter tumble.
National Semiconductor Corp. (NSM) and integrated-circuit-maker Analog Devices Inc. (ADI) are among those in the group that have already warned their earnings would fall short of expectations.
Even bellwether companies are facing declines. Motorola Inc. (MOT) is expected to report an earnings fall of 65 percent, and world chipmaking leader Intel Corp. (INTC), which announced 3,000 job cuts in April, faces a 16 percent drop from the second quarter of 1997, Abbott said.
Motorola issued a warning about its second-quarter earnings with its first-quarter report. It partly blamed a slowdown in Asian sales.
With the second-quarter profit-warning season barely under way, more tech companies may issue so-called pre-announcements before results finally roll in, beginning in mid-July.
Consequently, investors are being more choosy about which type of tech stock they are buying, analysts said, and some are looking to software companies as a haven.
"We have been more heavily concentrated in software this year, and the companies we do own are leaders in their field," said Alan Loewenstein, assistant portfolio manager specializing in tech stocks at John Hancock Funds. "We have reduced our exposure to hardware and computer chips."
First Call predicts that computer software-sector earnings will grow 22 percent from year-ago levels, only a minor slowdown from the 24 percent increase in the first quarter.
The biggest boosts to the software sector are expected to come from Microsoft Corp. (MSFT), PeopleSoft Inc. (PSFT), and I2 Technologies Inc. (ITWO), said I/B/E/S.
However, analysts cautioned that investors in this sector may become more nervous as the federal and state governments' antitrust lawsuit against Microsoft casts a pall over the group.
Another bright spot is the office and communications equipment sector, where earnings are forecast to grow 25 percent, up from 16 percent in the first quarter, due in large part to solid profits at Lucent Technologies Inc., I/B/E/S said.
But analysts said even the bright spots may not be enough to pull the technology-studded Nasdaq composite index out of a slump that began about two weeks ago amid bearish analyst comments, warnings about upcoming results, and a renewed slide in emerging markets, particularly Asia.
"We expect the Nasdaq to continue to underperform," said Gary Kaltbaum, technical analyst at J.W. Charles/CSG. "We believe the technology stocks are the most vulnerable sector even after last week's plunge. Several of the frothy Internet stocks have topped. It wouldn't surprise us to see a long, slow drop from here."
