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Tech stock revival highlight of the yearMadhavi Acharya-Tom Yew
Business ReporterPublished On Thu Nov 26 2009Email Print Republish Add to Favourites Report an error Share Share ArticleWill this Christmas bring an armload of goodies, or a lump of coal for people who invest in technology stocks?
It's already been a very good year for the information technology or IT sector. Technology stocks have been going through the roof. The technology-heavy S&P 500 has risen about 20 per cent. Stocks of some of the index's most popular names, such as Apple Inc., Google Inc., Microsoft Corp., and Hewlett-Packard Company, have more than doubled in the last 12 months.
If this downturn has been less painful for tech investors, it may well be because the previous one, the technology bubble that started the decade, was so devastating.
"Through this downturn, one reason why information technology did perform better was because they had better balance sheets. They had more cash on hand than they did the last time around," said Dan McClure, portfolio manager for Investors Group Global Science and Technology fund. "They cut costs more quickly having had the brutal memory of how bad things got seven years ago."
Keep in mind that investors in this area have also been patient. In seven out of the last nine years, returns in the technology sector have lagged the overall market. The exceptions are 2003 and 2007. Tech sector experts say that whether it's the PC market, smartphones, or new technology that blasts through mobile network congestion, investors have lots of avenues to watch.
For instance, the average corporate PC is about five years old and industry watchers are expecting a cycle of upgrading. That means several hundred million PCs and new software.
But the big action is really in the mobile wireless market.
Here's the big question for the coming year: how will Waterloo-based Research in Motion Ltd. fare, not only against Apple, but also against the coming crop that use the Android operating system developed by Google?
"If RIM doesn't fall off a cliff but keeps growing the way it has been for the past decade, the stock is probably going to double," said Duncan Stewart, director of research for Deloitte Canada covering technology, media and telecommunications. "Similarly if Apple fails to keep executing the way it has, it will get cut in half. There will be a lot of money made and lost by getting it right on this sector."
RIM saw its shares more than double from December to June, hitting $95 per share, then decline as investors worried whether rivals grabbing market share. The stock now trades in the $65-range on the Toronto Stock Exchange.
McClure believes the fear of RIM being swamped by the rising tide of competition are a bit overdone.
"The people who are using BlackBerrys are still very very loyal," he said.
"Having said that I do think there's more competition for RIM going forward. It's not just going to be a two horse race between the iPhone and the BlackBerry. Obviously the phones based on the Google Android platform are going to be compelling."
The fact is that Android phones first launched, and fell with a resounding thud, about a year ago.
"One year ago there were a whole lot of people talking about how Android was going to take a lot of market share away from RIM and none of it happened. Not even a wiggle. RIM in fact kept growing quite nicely and Android went nowhere," Stewart said.
What's different this time is the push from massive U.S. telecommunications firms. Verizon, which also carries RIM smart phones, is rumoured to be spending $100 million (U.S.) on advertising the much-anticipated Motorola Droid phone.
"At the very least, Verizon is no longer as exclusively committed to RIM as they were last year," Stewart said.
The so-called smart phone market – phones that offer voice and data applications – is hugely important to carriers such as Verizon and AT&T in the U.S., and Rogers, Telus and Bell in Canada.
When a smart phone really takes off, the increase in network traffic can also lead to more congestion. People who use iPhones, for instance, use between 50 and 1,000 times more data as people who have regular phones.
"When you're just talking on your Nokia phone, you're not using much spectrum. When you're downloading video, holy cats ...," Stewart said.
That's opened up a huge market for some companies that build broadband network equipment, such as Sandvine Corp., Dragon Wave Inc., Bridgewater Systems and Redknee Inc.
"What these companies do is sell gear to the wireless carriers that allow them to reduce the traffic load; to move the data around to reduce the data; and to make billing for the data easier.
"You don't widen the street. You don't build a new street, you just take out some of the speed bumps," Stewart said.