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High-Tech, Low Stress

This is a good time to be in the high-tech business. Revenues are growing at a solid pace; profits are strong across the board; debts are low; innovative companies are cranking out winners; equity valuations are setting records; consumers can't wait for the next electronics device; and businesses are similarly eager to adopt whatever technologies promise to continue helping them slash costs and boost productivity.

Contrast this picture with some other sectors of the global economy. The energy market is in a flux with crude oil and refined gasoline prices bobbing around like a yo-yo; housing is still erratic, despite record low interest rates; automotive is struggling back from a depression but failing to gain sufficient traction; and the US dollar, weakened by a mountain of national debts, is fading against a basket of international currencies.

It's not that the high-tech sector is immune against the vagaries of the global economy; it's just that it's in a little bubble of its own. Within that environment, the challenges are somewhat different than the problems facing companies in other segments, including those in the troubled housing, manufacturing, media, retail, and pharmaceutical sectors. {complink 7065|Standard & Poor's}, for instance, excluded high-tech in its recent ranking of the “most distressed” segments of the economy.

The three worst segments, according to the ratings and research company, are: media and entertainment; oil and gas; and retail/restaurants. “These sectors had the highest levels of risk among our lists of distressed companies,” said Diane Vazza, an economist with Standard & Poor's, in a report. “As of April 20, 2011, the three stressed sectors accounted for about 40 percent of the issuers listed as weakest links and four of the 12 total defaulters across all sectors in 2011.”

High-tech companies are not getting such negative descriptions. Even the handful of electronics manufacturers that are facing investor ire are in trouble, not because of financial stress but because of sub-par growth rates. {complink 1131|Cisco Systems Inc.} is one such company. Sales in its recent quarter rose to $10.9 billion from $10.4 billion in the comparable year-ago quarter, and net profits exceeded the average estimate from analysts. Yet Cisco's shares have declined on the stock market and remained under pressure today, May 16, because investors did not like its outlook for single-digit growth.

Cisco hit a brick wall because it stopped growing at a double digit rate and may not return to this operating level in the near future without some corrective actions, according to Brian Marshall, an analyst at Gleacher & Co. The solution is for Cisco to borrow a leaf from companies like Apple, Hewlett-Packard, and Dell and expand rapidly beyond its current routing/switching sector to increase its total available market (TAM). This strategy implies the continued erasure of old borders separating, for instance, PC vendors from consumer electronics manufacturers and software developers.

Cisco's TAM in the routing/switching market, for instance, could be as high as 70 percent, according to estimates, which leaves the company with little room for growth as smaller rivals snap at its heels. However, if the company embraces new market segments, its TAM could expand dramatically and new growth opportunities would emerge, according to Gleacher & Co.'s Marshall. Here's how he describes the possible scenario in a report:

    At first glance, it does not appear Cisco has a tremendous amount of runway left. However, this analysis fails to consider the incremental markets the company has been focusing on (e.g., advanced technologies and other products). Some of these new markets aimed at expanding Cisco's TAM include: application networking services, TelePresence, Unified Computing System (UCS), digital media, home networking, unified communications and wireless communications.

    These market adjacencies represent some of the most attractive secular growth opportunities in the information technology industry. When Cisco's total revenue is compared against its entire TAM potential (including adjacent markets and service opportunities), the penetration rate looks much more palatable at roughly 30 percent (e.g., $42.4 billion of total revenue divided by an approximate $150 billion TAM in calendar year 2010).

That's the kind of minor headache high-tech companies currently have. Plus, they have so much cash they can afford to make somewhat baffling acquisitions, such as {complink 3426|Microsoft Corp.} paying $8.5 billion for loss-making Skype.

The rest of the manufacturing world might be short of cash and starved of growth, but in the high-tech sector, the stress level is pretty low: The kitty is bursting at the seams and new market opportunities are opening up almost every hour. That's now. Tomorrow may present a different set of realities.

17 comments on “High-Tech, Low Stress

  1. eemom
    May 16, 2011

    This is a very interesting post.  Amid much unrest in several “high risk” market, companies in the high tech sector are being penalized for not having double digit growth.  While some companies, like Apple, HP, etc, have shown incredible growth, I wonder how long they can sustain that level of growth and how long can the market demand it?  How healthy or realistic are those expectations?

  2. bolaji ojo
    May 16, 2011

    @eemom, The expectations are neither realistic nor warranted. Every company out there in the high-tech sector wants to be as successful as Apple but the market cannot support many such overachievers. Apple has more than 70 percent of the tablet PC market and Samsung, Motorola Mobility, Acer, RIM, HP, Dell, etc., also want to be as big in the sector. Can we really have a market where several companies hold 70 percent market share each?

    The industry must accept the fact some companies will exceed others in performance and that many will not even gain a 2 percent market share. Because high-tech has grown at such an exponential rate everyone expect this would continue to be the case. It's highly unlikely, of course, but for now we have our unrealistic dreams.

  3. Kunmi
    May 17, 2011

    What an interesting article! It's quite normal that all these high tech companies does not have the same strenght for growth. If Apples and HP are able to declare 70% share value of the tech market, it is not surprising  because of the experience, name and infrastructures in place that are boosting the performance in which other new high tech companies may not be able to compete with. There is time and season with all these companies. Some of these small tech companies still have great potential to become the household high tech companies tomorrow.

  4. SunitaT
    May 17, 2011

    “they have so much cash they can afford to make somewhat baffling acquisitions”

     I feel companies should be very careful while doing acquisitions. We have seen how CISCO's decision to acquire “FLIP Phone” business backfired. This is one more reason why Cisco's shares  declined.

  5. Anna Young
    May 17, 2011

    Interesting! whilst the “rest of the manufacturing world are starved of cash” and are struggling in this hard times, yet high tech companies can boost exceptional growth. This is a good sign. It cannot be doom and gloom all round.

  6. Jay_Bond
    May 17, 2011

    It is interesting to see how the market and investors still react to companies like it was still the tech boom of the 90's. Many of these tech companies are doing great by any standards. Overall sales are up, profits are up, bank accounts are swelling with excess cash, yet they're looked down upon because they aren't stealing market shares away from others. There can only be one king of the hill, sometimes if you’re lucky there are two, but it is unrealistic to think that all the tech companies can be king.

  7. Ariella
    May 17, 2011

    That's exactly it, Bolaji. We always measure according to our expectations. If a company's earnings fall short of expectations, its stock will go down — even if it made a respectable profit. The reverse is true, as well.  

  8. Barbara Jorgensen
    May 17, 2011

    Tech has the mixed blessing of playing in the consumer and industrial marekts, and one is usually robust if the other falters. Even if consumers are spending less on the latest gadgets (and judging by tablet and smartphone sales they aren't–yet) industrial trends slow and steady. However, you are right about expectations–if high douible digits has been the norm, anything less gets battered by Wall Street.

  9. hwong
    May 17, 2011

    high tech is always the driving force of any developped countries. The only way to increase productivity is by investing in Research and development for high tech. And by increasing productivity, that drives the economy to the next level.

    However, being in the high tech industry for over so many years, I do see its ups and downs. Its very cylical by nature and that this may be the high and rosy time. But when it sinks, it sinks deep.

  10. prabhakar_deosthali
    May 18, 2011

    We must also remember that High tech sector is also the high speed sector compared the other sectors like realty or oil& gas or automotive.  Here the product design cycles are in months and not in years, The promising startups can climb the pinnacle with a few years and may also go bust in a matter of days. IF the pace is not maintained a high tech company can go down the drain in no time. High tech sector is like driving on an expressway where slowing down means certainly killing yourself.  So with that high risk &  high speed, the rewards are also quick and penalties are quicker!

  11. Mydesign
    May 18, 2011

       “Cisco's TAM in the routing/switching market, for instance, could be as high as 70 percent, according to estimates, which leaves the company with little room for growth as smaller rivals snap at its heels.”

       Bolaji, maintaining the market share is more difficult than capturing the market. Since they hold more than 70%, it doesn’t mean that there is no green room for further business. Market is growing day by day and hence the requirement too; moreover they can diversify the marketing strategy to attract more customers.

  12. Anna Young
    May 18, 2011

    @prabhakar, Nicely put. High-tech, high-speed, rapid-ascent, rapid-descent. That's the nature of the high-tech market and sometimes we forget this when things are nice and rosy as they are currently.

  13. stochastic excursion
    May 18, 2011

    One of the things that can hurt the tech sector is if speculation plays too much of a role.  High Tech is only part of a total industrial picture.  If a single technology captures too much of the imagination and resources of investors, it can run amuck and burn out fast, as we saw with the bubble early last decade.

  14. bolaji ojo
    May 18, 2011

    @stochastic excursion, The tech sector is blazing new trails and moving well beyond traditional boundaries to all aspects of all our lives. I attended a conference today and it was amazing to see the new products companies are developing for introduction within the next months (yes, months, not years.) In fact, many of the products on display have moved well beyond prototype and are in mass production.

     

    Still, I couldn't help but feel many investors are getting ahead of themselves. The tech sector is still a part of the entire economy. It's not complete in itself and eventually the problems evident elsewhere will show up in technology. What I know is that the best supply chain professionals anticipate things like this and bring it up to senior management before we again overbuild, overorder and undersell.

  15. hwong
    May 19, 2011

    Yes. There are alot of cool products out there. But it will take awhile in order for the mainstream to accept or buy in the product/idea. Not all of them will make it. It is very interesting to find out which of those are going to be hit or miss. There is a book called “tipping point” which describes what makes a product make it to the success stage.

  16. Anna Young
    May 22, 2011

    Stochastic excursion, I agree, it's well stated.

  17. SP
    May 22, 2011

    Who says high tech is low stress. But I agree as compared to other sectors its very relaxed.

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