Microsoft raises specter of doubt on tech recovery

SAN FRANCISCO Fri Jul 24, 2009 10:42am EDT

SAN FRANCISCO (Reuters) - The tech sector's road to recovery just got a lot bumpier.

Microsoft Corp's billion-dollar-plus revenue shortfall in its fiscal fourth-quarter abruptly dampened hopes that demand for PCs was on the mend and sent a spate of tech stocks tumbling after-hours on Thursday.

While Wall Street has rallied on better-than-expected quarterly results from chipmakers Intel Corp and Texas Instruments Inc this month, Thursday's disappointing batch of earnings underscored the challenges still facing many technology businesses.

"The problem is people have been running all stocks up, there's hasn't been any kind of differentiation at all," said Dan Niles, co-Chief Investment Officer of Alpha One Capital Partners.

According to Niles, the financial results of Intel and TI are not a reliable indicator of demand since they were component vendors that sold into the supply chain rather than to customers.

Investors have overlooked negative news from companies like Dell Inc, which sells its wares directly to customers and which warned last week of profit margin contraction and weak demand from corporate buyers of PCs.

Microsoft was a "reality check" said Niles.

Shares of Microsoft fell 7 percent to $23.75, after the software company reported its first ever annual decline in sales of the Windows operating system used in an overwhelming majority of the world's personal computers.

Fellow bellwether Amazon.com Inc, the world's largest online retailer, delivered lackluster results on Thursday, sending its shares down more than 6 percent in after hours trade.

And chipmaker Broadcom Corp, which reported better-than-expected revenue quarterly revenue, shed 4.5 percent of its value in extended trade.

"We had a barrage of bad news. That will probably set the market back a bit," said Fred Hickey, editor of the High-Tech Strategist Newsletter.

WHAT, ME WORRY?

The Nasdaq has risen roughly 12 percent in the past two weeks and the Dow Jones Industrial Average rose above 9,000 on Thursday for the first time since January, as earnings reports and encouraging signs in the housing market bolstered investor optimism that economic conditions are improving.

Not all market watchers are equally downbeat.

Tim Ghriskey, chief investment officer for Solaris Asset Management, thinks investors overreacted to the bad news from Microsoft after Thursday's market close.

"It has been a really great earnings season for technology in general. That strength was not confirmed by Microsoft," said Ghriskey, whose firm manages $2 billion.

And it's tough to find fault with the results delivered by Apple Inc on Tuesday. The Cupertino, California company bested analysts expectations as demand for the iPhone and Mac computers remained strong.

Apart from Apple, Canaccord Adams analyst Peter Misek said the common theme among tech companies in the second quarter was revenue that was either light or down double-digits year-over-year.

Tech firms had been able to show strong profit from cost-cutting, said Misek.

"If investors were buying tech stocks for current results then they made a mistake," said Misek.

But he said if investors had been buying stocks in anticipation of improving macroeconomic and banking conditions, then the pullback following Thursday's disappointing earnings results might not be as pronounced.

(Additional reporting by Jim Finkle in Boston and Yinka Adegoke in New York; Editing by Edwin Chan)

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