Industry Bellwethers Taking Hit As Smaller Companies Step Up

Many tech companies are holding their own in a period of stock market uncertainty, but quite a few industry bellwethers have taken a market hit over the past three months.

IBM took the biggest plunge out of the 15 companies surveyed, falling 11.19 percent from June 1 to Aug. 27. Other losses were seen by Hewlett-Packard, Cisco, Microsoft, Oracle and Google stock over the same three-month period.

However, the majority of the major technology companies surveyed followed the market trend and saw stock-price gains over the past three months. VMware showed the largest percentage gain, jumping 21.65 percent, closely followed by Symantec with 16.26 percent. Other companies that gained over the same period included EMC, Salesforce.com, Apple, Dell, Amazon, SAP and Xerox.

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Eric Martinuzzi, senior research analyst at Lake Street Capital Markets, said that the big-player losses are reflective of a larger problem that has been developing for a long time. As the market turns more toward Software-as-a-Service (SaaS), cloud and data storage, smaller companies are adapting more quickly to the changes and will continue to steal market share from larger companies that have traditionally held the market, Martinuzzi said.

"Macro trends have caught the big companies by surprise," Martinuzzi said. "People want to invest in growth stock, and if they don't see the growth potential, you become the equivalent of a bond or a dividend. You don't get the premium valuation anymore."

As more customers want to move toward outsourced IT and SaaS, the smaller tech companies have been better at adjusting to their needs, Martinuzzi said. The larger, mostly hardware-based, companies were having a more difficult time and were adapting to stagnant revenues by laying off employees. For example, in July Cisco announced it intended to lay off 4,000 employees in response to the rapidly changing market. Cisco shares plummeted nearly 10 percent in response to the news.

"They make the quarter, they make the earnings, but if they got in line for earnings and down for revenue that's not the outlook you want," Martinuzzi said. "The macro trend here is the big guys need to find what they're next line of growth is."

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Partners don't seem to be too worried about the dip in stock prices, as long as the products continue to deliver.

"I don't see any of them going out of business," said Fred Moore, managing partner at Moore Computing in St. Louis. "If their products quit performing, that's what would motivate me to change."

However, Moore did say that he thinks the bigger companies have overextended themselves in the stock market, which could be why the prices are falling.

"I think the big companies, their hands have been overplayed a little bit," Moore said. Moore Computing is, among others, an HP, Microsoft and Cisco partner, all of which fell in stock price over the past three months.

According to the numbers, most of the tech companies surveyed seemed to take the biggest hit in August. All of the companies posted gains in July except Microsoft, which fell $2.32 in share price over the course of the month.

Despite larger companies taking a hit, Martinuzzi said that the tech industry usually proves resilient to market trends, especially recently, as more customers are turning to the cloud and SaaS to replace employees.

"Tech has been resilient because it is an efficiency driver. If you buy software, you don’t have to hire people," Martinuzzi said.

PUBLISHED AUG. 28, 2013