Technology stocks had a torrid second half in 2007, as initial hopes that tech might prove defensive collapsed amid fears of . The FTSE 350 held up better than smaller caps, thanks to strong performances from Autonomy , Dimension Data and Micro Focus . Its worst performer - LogicaCMG - suffered from problems of its own making. But the derating of former star performers such as Aveva , which remains hitched to the booming resources market rather than corporate IT, shows that 2008 begins with market sentiment firmly against tech.
Software companies tend to be more resilient in a downturn than IT services providers, due to a higher proportion of recurring revenues. Higher margins and less reliance on headcount mean that software businesses "should exhibit half the earnings risk of an equivalently well-managed IT services business", say analysts at Citigroup. But that hasn't stopped investors selling down Misys, Sage and Micro Focus; and even Autonomy (one of the FTSE's few pure-software plays) has taken a hit, though have built confidence.
The software and computer services sector is trading 18 per cent below its historic average PE multiple, notes Citi, but the implied earnings downgrades have not yet materialised. Apart from LogicaCMG's , most top-ranking business IT providers have denied seeing any slowdown in financial services IT spending.
The fact that Dimension Data has managed to hang on to its premium rating reflects its exposure to emerging markets IT spending; investors' pessimism has focused on the US, with a corresponding negative impact on Sage. But while Sage has acquisition-related issues of its own in North America, the stock market's dim outlook for IT in 2008 does not seem to be shared by those in the industry.
Indeed, Northgate Information Solutions and NSB Retail were both last December. And the sector's somewhat indiscriminate derating could attract more bidders in 2008. Even premium-rated Autonomy could be a target for IT giants IBM, Oracle or Adobe after , for $1.2bn (£0.5bn).
But Deutsche Bank remains pessimistic, seeing the US software investment cycle peaking and fearing a repeat of past planning mistakes. "Picking the bottom given such acute demand uncertainty is close to gambling," say analysts.
Investors' treatment of tech hardware stocks has been no less vicious, with the read-across from weaker consumer spending - and profit warnings from electronics retailers such as DSG - having an immediate impact. Semi-conductor companies ARM and CSR are both way off their mid-2007 peaks, thanks to a combination of macro concerns and competitive threats. US giant Broadcom is chipping into CSR's Bluetooth dominance, while Intel is gunning for ARM as it pushes a new range of ultra-portable PCs and mobile internet devices.
Lower expected mobile handset growth - key to both ARM and CSR, even with a greater proportion of smartphones - could hit royalty rates for designs already sold, while other chip developers have warned of a soft licensing market in the US.
Even at current valuations, it seems technology stocks always have further to fall.
