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August 7, 2007
Tech Stocks and Sub-Prime
A post by Kevin Kelleher got me to comment on something here that I've been meaning to mention for a few days: What's the impact of sub-prime losses, and the credit crunch in general, on tech stocks? Kevin argues that its effect is currently minimal -- tech companies have big cash balances -- but could grow if/when consumer spending weakens.Fair enough, but that's not really the core of the current bear case for sub-prime's impact on tech. The current case flows from what happens to IT spending in heavily affected industrial sectors, like financials, real estate / homebuilders, insurance, and autos. And we saw evidence today during the Cisco quarterly earnings call that analysts are keying in on that question:
Nikos Theodosopoulos, UBS: I guess the question I would just ask there is, given the recent volatility in the market and some concern about macro factors, in your commentary and your guidance it doesn't sound like you're really seeing anything in your business to suggest any of that is impacting spending with Cisco. Can you comment on that? And then maybe specifically within the financial vertical, given what we have seen with companies in the mortgage market and the Bear, Stearns situation, there has been some concern that perhaps that market would be the first to show signs -- or I'm sorry, that vertical would be the first to show signs. It doesn't sound like you're seeing anything, but if you can give any commentary, that would be great.So, the weakening in IT buying among U.S. autos and financials is happening, but it's not yet become a major factor. Something to watch, of course.
John Chambers, Cisco Systems: ... U.S. enterprise, as we have stated before, is about 13% of our business. Obviously, industries that you talked about were a segment of that. If you look at our total U.S. enterprise, it was lumpy. And west, central, south, northeast doing fine -- north-central and Atlantic region, a little bit more challenging. Most all industries are doing well. We have seen softness throughout the year in automotive, as you would expect, and financial services, which we signaled during Q2 and Q3, and a little bit in retail.
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It's very interesting who is asking this question, with its convenient reference to "the Bear Stearns situation". There is also the less painful, but still painful, UBS situation:
http://business.guardian.co.uk/story/0,,2071880,00.html
BTW, isn't anyone going to chomp on the pun-bait of that name, Bear Stearns? I've been waiting for months, but so far no takers.
I was speaking to an IT industry analyst yesterday and he told me that this question is very much on the minds of his clients (the big IT suppliers). Finance is not just a vertical to them, these are the IT-industry's most prized clients. So there's real concern there.