Tech sector slips into a surprising slump

  • Article by: CHRIS O'BRIEN , Los Angeles Times
  • Updated: August 22, 2013 - 5:59 AM

Several of the tech industry’s heavyweights are seeing slow growth. One reason: Consumers waiting for the next big thing in gadgets.

hide

A Microsoft retail store in downtown Portland, Ore. Microsoft took an ugly write-down of $900 million because of poor sales of its Surface tablet.

Photo: DON RYAN • Associated Press,

CameraStar Tribune photo galleries

Cameraview largerrr

– In a surprising turn, the tech industry is in a slump even as the U.S. economy picks up steam.

The announcement last week that Silicon Valley giant Cisco Systems Inc., which sells networking and telecommunications equipment, plans to cut 4,000 jobs is the latest sign of a slowdown that has sucker-punched high-tech firms.

After a remarkable six-year boom set off by the introduction of the first iPhone in 2007, tech companies of all shapes and sizes are finding growth slowing, and even contracting in some cases.

Though there are still bright spots among companies that help manage data or provide cybersecurity, many of the industry’s biggest companies — Microsoft, Google, IBM and Dell — are struggling to figure out the changes in the way businesses and consumers are buying and using technology.

There even have been signs that tech’s dysfunction is having a wider effect. When Wal-Mart reported disappointing earnings last week, the company’s executives pointed the finger at consumer electronics for a lack of exciting new products.

“Our performance was pressured by soft results in both electronics and media and gaming,” said William Simon, a Wal-Mart president and executive vice president, on the company’s earnings call with analysts.

It’s not a bust — not yet at least. And it isn’t as serious as the 2000 dot-com crash, when tech’s fortunes quickly deteriorated. Indeed, on the ground in Silicon Valley, there is a bit of a disconnect because competition for hiring remains intense.

But in recent months, tech earnings have plummeted as tech companies have reported slower growth or declines. Venture capital has fallen almost 7 percent this year. Tech mergers and acquisitions have tumbled. And tech stocks have lagged the broader stock market this year. As of early August, the S&P 500 was up 19.7 percent, but tech stocks in the index were up only 11.1 percent, one of the lowest-performing categories.

While observers fumble for explanations and many remain optimistic about tech’s long-term outlook, the industry is wondering whether this slump is simply a pause or the new normal.

“What I’ve seen is that a lot of the tech heavyweights are having challenges,” said Patrick Moorhead, principal analyst at Moor Insights and Strategy. “There’s a fundamental shift in the marketplace that many people are grappling with. What we’re seeing is a transitional period.”

And tech finds itself in the unusual position of being a laggard in the economy’s recovery.

“Technology remains a big drag on earnings growth,” Zacks Investment Research analyst Sheraz Mian wrote in a recent report. “The sector’s earnings picture is very poor.”

Being labeled a “drag” is the ultimate insult for an industry that likes its growth fast and furious. But why has tech lost its mojo?

There doesn’t seem to be a single villain.

Mian chalks it up to the lackluster global economy. Tech firms are increasingly dependent on sales and profits abroad, where corporate spending remains weak. In the U.S., others have pointed to the faster-than-expected collapse of PC sales.

“That’s having a ripple effect through a lot of sectors of technology,” said Greg ­Harrison, a corporate earnings analyst at Thomson Reuters.

Companies continue to shift from buying their own hardware and software to renting computing power through cloud-based services in which files are kept at massive data centers in far-flung locations. These save money for buyers but generate less revenue for sellers.

Consumers, meanwhile, appear to be showing signs of fatigue after embracing so many new gadgets in recent years.

  • related content

  • Hewlett-Packard, still trying to turn itself around, has cut thousands of jobs.

  • Silicon Valley giant Cisco Systems said it plans to cut 4,000 jobs.

  • Apple still rules the tablet market, but iPad sales declined in the most-recent quarter.

  • get related content delivered to your inbox

  • manage my email subscriptions

ADVERTISEMENT

Connect with twitterConnect with facebookConnect with Google+Connect with PinterestConnect with PinterestConnect with RssfeedConnect with email newsletters

ADVERTISEMENT

ADVERTISEMENT

ADVERTISEMENT

ADVERTISEMENT

ADVERTISEMENT

ADVERTISEMENT

 
Close