Is Tech Leading the Recovery?

Better-than-expected results from bellwether Intel Corp. (Nasdaq: INTC) are lending credence to the notion that technology - fueled by consumer spending - is leading the recovery.

The tech-laden Nasdaq Composite Index is the only major stock index to post a gain over the past five years, rising more than 13% as the Standard & Poor's 500 Index fell more than 3% and the Dow Jones Industrial Average is flat. While the financial crisis has been hard on all three indices, the Nasdaq has gained more than 37% this year compared to the roughly 20% rise on the S&P 500 and a 14% increase for the Dow.

Despite the recession, it's consumers - not businesses - that have demonstrated they are willing to spend on technology that has innovative features that make their lives easier. For example, Apple Inc. (Nasdaq: AAPL) sold more than seven times the number of iPhones in its 2009 third quarter than it did in the same period last year.

"Technology should benefit first and foremost in a global economic recovery," Edward Yardeni, an independent economist and investment strategist told The New York Times.

Performance of semiconductor companies such as Intel and Applied Materials Inc. (Nasdaq: AMAT) can be viewed as leading indicators, since chips orders are ahead of the assembly of devices like computers and mobile phones.

Intel kicked off tech sector's earnings season by soundly beating Wall Street estimates on Tuesday. The company posted a net income of $1.9 billion, or 33 cents per share on revenue of $9.4 billion. Analysts' consensus estimates called for earnings of 28 cents on revenue of $9.0 billion, according to Thomson Reuters Corp. (NYSE: TRI)

Applied Materials reports its fourth quarter results on Nov. 11.

The earnings beat by Intel was one of two catalysts that propelled the Dow past 10,000 today (Wednesday) for the first time in a year. The other was a strong earnings report from JPMorgan & Chase Co. (NYSE: JPM). Intel and JPMorgan are two of the 30 companies on the Dow.

Intel's sales, while still down 8% from the same period last year, were helped by improving retail sales of computers in the United States and Asian markets like China. Business technology sales aren't expected to bounce back until next year, but Intel Chief Executive Officer and President Paul Otellini told analysts in a conference call his company was "pleased with the acceptance of [server processor] Nehalem in the enterprise," adding the chip is "generating growth opportunities even in a down economy and will be a strong profit driver for Intel in the coming quarters."

Still, "the strength in our business remains primarily consumer driven with broad-based demand across all geographies," Otellini said.

Most tech companies - such as chip, computer, mobile phone and video game makers - have highly seasonal businesses, with the bulk of sales coming in the fourth quarter of the calendar year due to the holidays. Intel is forecasting roughly $10.1 billion in sales for this holiday quarter, which would be an improvement over the $8.2 billion in revenue reported in the same period last year.

Advanced Micro Devices Inc. (NYSE: AMD), an Intel rival and leader that makes graphics chips for computers and video game consoles, reports its earnings today (Thursday). AMD, which has roughly an 11% market share in processors to Intel's 80%, is expected to report a loss of 42 cents on revenue of $1.2 billion.

News and Related Story Links: