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Tech Stocks Still Prized as Analysts Watch for Signs of Recovery - 2002-01-12

Growing confidence that the U.S. economy is improving is prompting investors to return to technology company stocks. Because technological innovation was key to the economic expansion of the last decade, analysts are watching the U.S. tech sector for signs of recovery.

Technology companies took off during the 1990s, with tech industries growing at a faster pace than the U.S. gross domestic product. And that, says Forrester Research analyst Bruce Temkin, is part of the problem.

"In 2000, based on our analysis, corporate America actually overspent what they should have on technology by about 12 percent, representing nearly a $63 billion bubble in technology purchases in 2000," added Mr. Temkin. "And I think that bubble, along with the economic downturn has really caused a shock wave of recession magnitude in the tech sector."

For Juppiter Research analyst Ken Allard, corporate America not only overspent on technology during 2000; Corporate America misspent. "We have many clients that I could point to that invested, in some cases tens-of-millions of dollars, in large-scale applications that were absolutely mismanaged and ultimately were just shut down," he said. "There [are] really not a lot of companies you can point to yet that have learned how to marry that understanding of business problems to technology solutions."

Mr. Allard blames the misspending on the national euphoria over new technology, coupled with easy access to investment money.

But according to Bruce Temkin, technology usually comes in waves. The first is the wave of innovation and that is followed by a usage wave, he said, where businesses figure out how best to take advantage of that technology. He believes the misspending was part of the innovation wave.

"It was not that they had bad ideas in what they were investing in," he went on to say. "It was that they did not realize the changes that they would have to make in how they operate, to take advantage of that technology. They were investing ahead of their ability to capture gains."

Part of the problem, Ken Allard says, is that in many companies' business managers, rather than technology experts, were put in charge of buying and implementing new technology.

"Until we figure out this skills gap and companies change the way they are organized and the way they manage these investments, I am not sure we are going to see a return to the boom technology investments we saw in the mid 1990s," explained Mr. Allard.

Both analysts agree that change is beginning. But they predict the "technology usage wave" - and with it, economic recovery in the U.S. technology sector - will not take hold until at least the second quarter of 2002.