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Tech Industry Misery: A prime buying opportunity

Posted April 8, 2008

“All of this news may appear to paint a gloomy outlook for investors, but it does not have to. After all, these sorts of announcements and business-strategy changes are all part of normal business and economic cycles.” - Andrew Snyder

By Andrew Snyder

Baltimore (TFN)– Spring is a time of renewal and change for the environment. It also appears to be a time of monumental changes for the technology industry. Unfortunately, the changes in the business world are not nearly as scenic.

While cherry trees and daffodils are blooming across the continent, the nation’s computer hardware producers are shriveling and shedding any unnecessary weight. Tens of thousands of jobs and billions of dollars are being lost. But like we see each fall, sometimes it is necessary to drop the unessential just to survive.

No matter where I seem to look this week, I cannot keep away from news of hardware producer woes. Yesterday, Advanced Micro Devices (AMD) made headlines as it warned Wall Street of disappointing revenues and its plans for a major workforce reduction.

The processor developer expects its first-quarter revenues to be down by as much as 15% over its fourth-quarter top-line figure. It previously expected a drop of just 5% to 10%. The Street shuttered at the news at took 5% of AMD’s share price. As of today, the company’s value has dropped by over 60% since its 52-week high reached in July.

Pink slips galore

As if the huge plunge in share price has not hurt enough people, the company just announced plans to reduce its workforce by 10%. That equates to a loss of more than 1,600 jobs.

AMD is not alone in the world of layoffs. We already knew Dell had plans of major job cuts, but now it is telling investors to expect significantly more cuts than the 8,800-worker figure it had previously announced. Its share price is down by more than 35% since November.

All of this news may appear to paint a gloomy outlook for investors, but it does not have to. After all, these sorts of announcements and business-strategy changes are all part of normal business and economic cycles. As these relatively young companies mature, their business models must change.

For investors, this shakedown leads to profit potential. This economy will eventually recover and the highly cyclical technology sector will find itself on the mend. Investors smart enough to grab shares of the companies when the bulls are running scared have a shot at big money.

Good debt, bad debt

Another sign that these industry tremors lead to a profit opportunity is the news that many technology titans, once known for their cash-hording ways, are heading to the bond market for a shot at growth. While nearly all other industries are running from the debt market, companies like Dell, Oracle and Microsoft are looking to increase their leverage.

Cheap rates and a rather eager capital market give these companies a shot at acquisitions and capital growth that would normally not make sense. When the economy is soaring and money is expensive, buying new growth opportunities is risky business. But now that the economy is barely crawling ahead and money is downright cheap, it pays to take on a bit of risk. It could spell exponentially larger growth opportunities just a little ways down the road.

The technology industry may not be getting near the attention as investments like gold and oil companies, but the opportunities are certainly there. In fact, you have a better shot at big gains with these little-discussed plays.

Let everybody else play the whims of the Street with those picks. You should play the proven business-cycle opportunities. History proves they will once again be winners.

It is a time of well-needed change. But it is also a time of beauty.


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Posted by Andrew Snyder · Filed Under US Stocks and Markets 

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