Last Month, we addressed the question of IT growth and its perceived timing, and assessed its past cyclical development and potential future recovery. We feel it necessary to further expand on this topic, as it constitutes a viable sector in the global economy.
The information technology sector has continued to show weak performance over the past month. The world IT index has lost 14 percent since the beginning of the year, making it the second worst performer of the year so far, just better than telecommunication services.
Among the sub-sectors of IT, the year-to-date performances of Internet, communications equipment, computers, software and IT services are all in the minus double digit area. The semiconductor and equipment sectors have done relatively well, as early cyclicals of the IT sector. However, recent weakness in the memory chip prices caused these areas to give back earlier gains. The office electronics area, which has some defensive characteristics, has been relatively resilient.
Valuations expressed in terms of the price earnings ratio (PER) appear cheap if we compare them with those of the industry peak in 2000. However, if we compare current PERs with those that obtained in 1998, most sub sectors still look expensive in our view. Exceptions, here are software and office equipment segments. We believe that the software sector, whose performance typically lags in the recovery phase, is a relatively attractive area for investment.
The fact that the software sector’s price to sales ratio has come down to the level of the pre-IT bubble period also supports our argument. We recently had a chance to see top manager of European technology companies. The meetings confirmed the following:
* Positive trends in the semiconductors capital equipment market, especially the demand is firm for equipment to produce more technologically advanced products (e.g. smaller chips)
* Managements of large companies are confident of improvement in the 2H, due to the solid business pipeline
* Telecom operators’ capital spending is expected to remain weak
* The set top box market should gradually kick off. However, the expansion of the Digital TV market is still uncertain owing to high deployment costs. Digital consumer electronics markets are generally doing well.
Everybody agrees that wireless technology will be the key issue in the next IT upturn. However, expectations for 3G demands are in our view, too optimistic particularly in Europe, given the rapid expansion of other types of wireless technologies (such as wireless Local Access Network) the other parts of the world.
More thoughts on wireless
technologies…
802.11b (of WiFi) is currently the dominant technology deployed in wireless LANs. It offers potential speeds of 11 Mbps in the unlicensed 2.4Ghz spectrum band. The technology is backed by major IT companies such as Cisco, Microsoft, IBM and 3Com. The 802.11b access points are being installed in the public spaces such as airports, hotels, convention centers, train stations and restaurant in the US and in some parts of Asia. Wireless LANs are expected to show strong growth in the near term due to the lower deployment costs and higher speeds relative to 3G. In Europe, wireless LAN services are available in Scandinavia.
We believe that wireless LAN will expand rapidly among business users. Ease of access and high speeds allow them to download large amounts of data through mobile computers including PDAs. People expect that 3G will only reach the mass market in 2005 or even 2006. Thus, while 3G is facing delays, wireless LAN is becoming a threat, especially in the mobile data market for business uses.
However, wireless carriers have started to see the wireless LAN as an opportunity, rather than a threat, to 3G. The combined services of 3G and wireless LAN with smooth roaming capability will offer ubiquitous access for mobile Internet users. We believe that wireless LAN will turn out to be a powerful value-added tool for existing wireless carriers in winning over subscribers. For mobile phone makers, who target to reach unit sales growth, wireless LAN is a potential threat, because mobile Internet access may increasingly be done through devices other than mobile phones in near future. If people are expected to use mobile phones for voice only services, mobile phones will become a commodity product. Nevertheless, it is too early to quantify the impact in our view.
The excitement over the other short-range wireless technology called Bluetooth has somehow subdued since its first launch in late 2000. Bluetooth is a standard setting the specifications for low cost, short range (100m) radio links between various electronic devices such as PCs, mobile phones and other consumer products. Founders were Ericsson, IBM, Intel, Nokia and Toshiba. Later, 3Com, Lucent, Microsoft and Motorola joined the group. The number of products using Bluetooth is growing, but much slower than initially expected. Market researchers are optimistic about the Bluetooth’s future and expect unit shipments to reach 700 million in 2005 from 40 million in 2002.
