IBM Warning Sends Shock Waves Through Tech Sector

When IBM (NYSE: IBM) warns, the tech sector listens. The technology giant on Monday said it expects first-quarter revenue and profit will fall short of analysts' estimates. The announcement was Big Blue's first earnings warning in more than a decade.

The warning sent IBM's stock down 10.1 percent to $87.41 and dragged some other tech stocks down with it. In early trading Tuesday, IBM shares had edged up to $88.17.

The company said first-quarter profits will be between US$1.65 billion and $1.75 billion, or 66 cents to 70 cents per share, while revenue will total $18.4 billion to $18.6 billion. Analysts polled by First Call/Thomson Financial had been expecting earnings of 85 cents per share and revenue of $19.65 billion.

Slow Tech Spending

The warning sent a signal that companies are still reluctant to invest in technology products and services. "We saw a continued slowdown in customer buying decisions in the first quarter," IBM chief financial officer John Joyce said.

Joyce noted that the business environment has been "very tough" and that the first quarter is usually the weakest one of the year for technology purchases.

In fact, a recent study by Forrester Research found that most large companies plan to curb tech spending in 2002, though a return to double-digit growth is forecast for 2003.

According to the Forrester report, tech spending by large companies will drop 14 percent this year.

IBM, which reports first-quarter earnings on April 17th, saw revenue for its technology group -- which supplies parts to many large tech companies -- decline 35 percent in the quarter. The company said it expects to report a pretax loss of $200 million in the quarter for the division.

New Safe Haven

IBM has long been considered one of the safest technology companies in which to invest, but that may be changing. Even as confidence in blue-chip tech stocks wavers, some analysts remain confident that top e-commerce firms are relatively safe investments.

Yahoo! (Nasdaq: YHOO), which will report earnings after market close April 10th, will be the first Internet company to report first-quarter financial results, and Lehman Brothers analyst Holly Becker said she expects a strong performance.

Goldman Sachs analyst Anthony Noto is also optimistic and said Yahoo's positive results could serve as a "sector catalyst, attracting other investors to look for Internet names that can deliver strong quarterly results."

E-Commerce Growth Forecast

Noto said he sees general growth in the e-commerce sector in the first quarter, and added that he expects eBay (Nasdaq: EBAY), 1-800-Flowers, Amazon, Expedia (Nasdaq: EXPE) and pay-for-performance Internet search firm Overture to do particularly well. AOL remains a top pick, too, he noted.

"The e-commerce sector is benefiting from an improving economy and continued adoption by consumers," Noto said, adding that it will continue to do well in 2003 as online shopping becomes even more popular.