Investors may remember 2005 as the year technology stocks heated up again as shares of Google Inc. and Apple Computer Inc. soared. But those stocks may mask a maturing of an industry once notorious for boom-and-bust cycles, analysts said.
Google's 118 percent surge in 2005 and Apple's 122 percent leap contrast with the 1.8 percent gain of the technology-heavy Nasdaq Composite Index and the 3.4 percent advance of Standard & Poor's 500 Index. The more sedate performance of the broader indexes suggests technology stocks have settled into a less volatile pattern after the tech bubble burst, analysts said.
"The way people still want to think about tech is they're looking for a really smoking tech stock," said Cindy Shaw, a computer hardware analyst at Moors & Cabot Capital Markets in San Francisco. "But the business is maturing. It's a mid-single digit topline growth industry."
While Apple's hot-selling iPod music players helped drive up revenue an average 29 percent annually since 2001, average revenue growth at IBM, the world's No. 1 computer company, has been a mere 2.1 percent since 1999. International Business Machines Corp. now expects to grow between 1.5 times to 2 times gross domestic product, according to an IBM investor presentation in May.
And Dell Inc., the biggest personal computer maker, has settled into slower growth after 16 percent to 18 percent quarterly revenue increases a year ago gave way to a company-projected 9 percent to 11 percent this quarter, "a very healthy growth rate for a company our size," Dell Chief Executive Kevin Rollins said last month.
Web search leader Google, which first sold shares to the public in 2004, now has a market value of $124.2 billion, the third biggest on the Nasdaq Composite index after Microsoft Corp. and Intel Corp, and just shy of IBM's $130.2 billion. Google's revenue more than doubled from 2003 to 2004.
Such growth may seem reminiscent of the technology bubble of the late 1990s, when stock prices surged on the first day of trading only to collapse weeks or months later. But now that the smoke has cleared, technology stocks could be a safer if less sexy investment than in the past, according to analysts.
Businesses in 2005 boosted spending on information technology after cutting back in the first part of the decade, when bloated technology budgets dragged down profits. Besides Google and Apple, stocks of computer storage companies such as Network Appliance Inc. and EMC Corp. are seen by analysts as outperforming the broader computer hardware market.
And IBM, whose shares slumped 16 percent in 2005, may be an attractive long-term investment once the earnings drag of pension expensing begins to let up in 2008, Shaw of Moors & Cabot said.
"Three-to-four years ago, in the worst of the downturn, the only money they spent was because got they got a really good return on investment and got it quickly," Shaw said. "It was all about saving money. Now, companies are spending money on technology to become more competitive and to gain new capabilities."
Shaw added, "For selected tech companies that have the right offering, you can see some very nice growth. But those are going to be selected tech companies."