Caution in order over outlook for technology firms

TECHNOLOGY firms are supposed to prop up US earnings growth this year, helping the stock market move higher.

Recent events suggest otherwise.

Intel made a profitability forecast that failed to meet analysts’ projections, triggering the biggest one-day drop in shares of the world’s largest computer chipmaker since July.

Apple’s outlook for the current quarter wasn’t as rosy as some estimates implied.

Shares of the maker of iPod digital music players sank after an initial rally, triggered by sales and earnings figures for last quarter that trounced estimates.

Cisco Systems, whose earnings aren’t due until next month, had its worst two-day stock performance since May. Banc of America Securities, Merrill Lynch & Co. and Prudential Equity Group LLC, citing the prospect of slowing growth, all downgraded the world’s largest maker of computer-networking equipment.

None of this bodes well for computer-related companies, which analysts expect to deliver the fastest profit growth this year among the 10 main industry groups in the Standard & Poor’s 500 Index. Forecasts call for a 20% increase on average, up from 8% last year, according to Thomson Financial.

The figure for 2007 is more than double the 8.9% expansion foreseen for the S&P 500. Industrial companies have the second-highest forecast at 12%.

Microsoft’s release of the Windows Vista operating system has fuelled the optimism. Consumers will be able to buy Vista on January 30, two months after business customers.

Intel stands to benefit from the demand for new, more powerful personal computers to run Vista. Yet the Santa Clara, California-based company is battling to regain market share in PC processors from Advanced Micro Devices Inc, its sole rival.

Price cuts will cause this year’s gross margin, or profit after production costs, to narrow to about 50% of sales from 51.5% last year, Intel said. The stock tumbled 5.7% yesterday in response to the estimate.

Apple forecast sales of $4.9 billion and earnings of as much as 56 cents a share for its fiscal second quarter, ending in March. Analysts expected more on both counts.

Shares of the Cupertino, California based company dropped as low as $89.37 today from a high of $99.48 in extended trading yesterday.

Shares of Cisco fell 3% two days ago after Banc of America’s Tim Long and Prudential’s Inder Singh turned neutral.

Their calls on the company, based in San Jose, California, led to the highest returns for investors during the past year, according to data compiled by Bloomberg.

Merrill’s Tal Liani, the next-best performer, followed suit yesterday. Cisco is expanding “in areas that carry lower-than-average gross margins,” such as home networking, he wrote in a report. The stock fell another 3.8% for the day.

The rating cuts followed a 68% surge in Cisco’s shares from their 2006 low to this month’s high, set January 12.

Technology stocks as a group also rallied, with their S&P 500 index climbing 29% from last year’s low. The outlook at Intel and Apple and the change of heart on Cisco show similar caution is in order.

David Wilson is a Bloomberg News columnist. The opinions expressed are his own.