Outlook On Tech Stocks Buoyed By Spending Plans

The current tech-stock rally is being fueled more by coolheaded reality than hot air, market analysts say. Hence, there's reason to believe it's sustainable in 2004, though perhaps at a less-frenetic pace.

"The pickup we saw last year should continue, but the pace will vary from sector to sector," says Drew Brosseau, managing director at SG Cowen Securities Corp. The growth in stock prices is partly a correction for pessimism in early 2003, when war in Iraq was imminent, he says.

The IT sector had a strong year. The InformationWeek 100 posted a 62% gain in 2003, compared with a 26% gain for the Standard & Poor's 500 and 28% for the Dow Jones industrials.

Tech stocks experienced a 23% run-up in price-earnings multiples last year, rising from 19 times earnings at the beginning of the year to 23 times earnings at the close, according to SG Cowen. The S&P 500 edged up only slightly, from 16 times earnings at the beginning of the year to 17 times earnings at the close. Brosseau cautions against becoming too enamored with the IT sector; while not overly expensive today, those stocks "don't have much upside," he says. Steve Block, senior research analyst at Bay Isle Financial, writes in an upcoming commentary that strong business demand will "significantly boost profits for semiconductors, hardware, and software" companies.

Nine of the 16 categories in the InformationWeek 100 included at least one company that increased its share price by 100% or more. Two categories--client-server workgroup and communications infrastructure--included four such companies.A wild card for this year is how well the expected initial public offering of Internet search engine Google Inc. does. The offering, which could fetch as much as $4 billion, could spark additional IPOs by tech companies, says Paul Bard, senior analyst at Renaissance Capital. The IPO market could use the lift--68 companies went public last year, compared with 486 in 1999.

Renewed investor confidence in the tech sector is grounded in anticipated IT spending increases. An SG Cowen survey forecasts IT budgets to increase 3.9% on average in 2004, compared with a 2.2% rise in 2003. According to InformationWeek Research's Outlook study, nearly half of companies expect IT spending to exceed 2003 levels.