Brian.oco 0 Posting Whiz

Kind of a quiet day in the technology stocks world, which might be considered good news considering the drubbing the sector has taken this week.

Sun Microsystems was in the news, signing off on a Solaris 10 distribution agreement with Dell to make the Solaris Operating System and Solaris support services available directly to customers for most, but not all, Dell PowerEdge servers. The multi-year distribution agreement was announced live from Oracle OpenWorld, where Sun President and CEO, Jonathan Schwartz and Dell Chairman and CEO, Michael Dell, are keynote speakers. That should lead to a bum up in Sun’s and Dell’s stocks.

Otherwise, all the positive action is in the router market, particularly with Cisco Systems. I mentioned yesterday that Cisco had reported solid quarterly earnings and big sales revenues. On the flip side, Cisco’s management also warned that corporations would begin to taper off on their tech investments – a warning that led to the technology stocks downfall we’ve seen in the markets this week.

Yesterday I wrote that tech stocks were a risky play – in the short term and even heading into 2008. For balances sake, I’ll quote Motley Fool columnist Tim Beyers who writes today that the tech sector might actually be a great value play.

Beyers cites a September survey by Russell Investment Group of 340 investment managers, which found that a whopping 73% of these pro stock pickers are bullish on tech -- an all-time high. He also lists three reasons we should be bullish on the tech sector.

Take a look for yourself -- straight from Beyers.

1. Once you're in, you're in. Tech firms tend to operate on long-term contracts. Think of Oracle. The database specialist requires its customers to sign up for multiyear maintenance deals after installing its software. That way, it's guaranteed a rich stream of predictable, high-margin revenue, much of which becomes free cash flow.

2. All business is e-business. Name a company. Who's that again? Oh, yeah, I know them. They've got a database. And a few hundreds PCs. And a few servers to feed those PCs and two dozen internal and external websites. File cabinets? Nah, they trashed those years ago.

3. A better balance sheet. By virtue of their innovative streak, tech firms are more likely to realize higher margins and, thereby, greater cash flow than your average retailer or manufacturer. So much cash flow, in fact, that they can't ever seem to spend it all. Seriously. Ask CEO Eric Schmidt what his plans are for Google's 14 billion war chest.
Says Beyers, “Tech is timeless because all business, in every sector, depends on it. Software, hardware, chips, Web -- they're all essential elements of a global economy.”

A good case from Beyers. My point is that if the global economy hits a rough patch, like it seems to be doing now (no, I’m not ready to use the “recession” word yet), then Cisco’s bean counters may be right – companies will be buying less technology products.

One exception is the router market. According to a newly published report by Dell’Oro Group, the service provider router market in the third quarter of this year pushed past the $2 billion mark for the first time. Cisco Systems and Juniper Networks each recorded record revenue from sales of service provider routers and strengthened their number one and two market share positions, respectively.

“Internet traffic growth is driving strong demand for routers, and most router manufacturers are at or near record sales levels,” said Shin Umeda, Vice President at Dell’Oro Group. “Our market outlook for the near term is very positive, and we will likely see more sales records in the fourth quarter,” added Umeda.

Worldwide Service Provider Router Market Leaders (Revenue)

Vendor 3Q07 Rank Y/Y Growth
Cisco 1 31 %
Juniper 2 36 %
Alcatel-Lucent 3 52 %
Huawei 4 145 %
Redback 5 -11 %

So maybe that’s your best play if you want to be in the technology sector. It certainly is one of the few bright spots.

Happy bargain hunting.

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