Why Tech Stocks Dragged Down the Dow Today
After trading in the red all day, and at one point slipping below the 12,000 mark, the Dow Jones (INDEX: ^DJI) surged forward in the afternoon before closing about even. However, the tech-heavy Nasdaq (INDEX: ^IXIC) trailed the Dow by a wide margin, closing down 0.99%.
Oracle (NAS: ORCL) was to blame. Last night the company not only missed on earnings and revenue but also forecasted forward revenue well below analyst expectations. With Oracle being a nearly ubiquitous powerhouse across global data centers, its uninspiring quarter led to a sell-off across technology stocks.
Despite the Dow's breakeven performance, two-thirds of the stocks within the index closed out the day in positive territory; this was truly a day where tech stock weakness was to blame. Of the companies in the red, half of them came from the technology sector.
Tech Stocks Dragging Down the Market
|IBM (NYS: IBM)||3.08%|
|Cisco (NAS: CSCO)||2.64%|
|Intel (NAS: INTC)||0.67%|
Source: S&P Capital IQ.
Were tech investors right to panic? I wouldn't be so certain the sell-off was warranted.
For one, Oracle's quarter closed out at the end of November. I have little doubt IT spending had a prolonged period of weakness throughout November. The Dow cratered throughout the month before rapidly picking back up again at the end. When markets are in freefall, that can lead to quick cutbacks in IT spending as businesses rein in expenses in the face of uncertainty. We saw the same process during the summer, when plummeting markets led to a spree of tech companies reporting poor earnings in August. However, when markets bounced back, so did IT spending.
So it looks as if we might see history repeating itself right now. On its conference call, Oracle noted a heavy uptick in orders throughout the end of November. That leads me to believe that as the markets rallied, IT departments who saw their spending crimped in early November were free to spend once again.
However, that theory doesn't fully account for Oracle's negative outlook for the quarter ahead as well. If the company saw sales rebounding so steadily, why is next quarter so far below expectations? One thought is that Oracle could be sandbagging results a bit. Yet I'm more inclined to believe there might be some company-specific factors at play. For one, Oracle has long been behind the curve on cloud computing and could be seeing the effects of having smaller competitors, such as salesforce.com, stealing business. The company also admitted on its call that hardware sales have been hit as customers evaluate new products from Oracle. Reluctance to switch over to new hardware upgrades could continue into the next quarter as well.
In the end, there's ample reason to be cautious that Oracle's poor quarter and guidance point to a slowing IT spending environment. Intel also recently warned of upcoming sales weakness, so this isn't the first warning from the tech industry.
However, this isn't a closed case that the Oracle's malaise is reflective of broader market conditions rather than company-specific weakness. One important note from the call was that Oracle saw continuing strength in its Asia-Pacific region (excluding Japan) and also Latin America. Those are the same regions that have also been strong contributors to IBM's bottom line in recent quarters.
Best of all, if businesses continue to invest in technology across those regions, it points to a general positive spending environment. That's great news for Apple (NAS: AAPL) , which launched its newest iPhone in more than 20 countries last Friday that included high-growth markets such as Taiwan and Brazil. Last quarter, Apple saw $900 million in sales to Brazil and Taiwan is part of its "Great China" segment, which now comprises 16% of company sales.
To hear more about how tech's free-fall today, the following video has more of my thoughts on Oracle's quarter and what it means for technology stocks.
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At the time this article was published Eric Bleeker owns shares of no companies mentioned here. The Motley Fool owns shares of IBM, Microsoft, Apple, Cisco Systems, and Intel, has created a bull call spread position on Cisco Systems, and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Intel, Microsoft, salesforce.com, Apple, and Cisco Systems, shorting salesforce.com, and creating bull call spread positions in Apple, Intel, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.