Wall Street Beat: Net, telecom sectors spook IT investors

Worrying news about Google, Sprint and Nortel this week scared off investors in the 'Net and telecom sectors, as Dell results underscored a possible consumer spending slowdown.

Reports from Internet market researcher Comscore and UBS knocked Google's share price below US$500, almost $300 down from its $740 high last quarter.

In a report issued Monday, ComScore said it saw a 7 percent decline last month in the number of U.S. consumers clicking on ads on Google search pages. Several brokerages reduced financial forecasts for the company. UBS reduced its price target on the company by $60, to $590, and lowered its estimates for both 2008 and 2009. But in its research note, the brokerage said the Comscore figures were only part of the story.

"Without meaningful monetization improvements and new revenue streams, near-term numbers for Google are at risk," UBS said.

One problem that industry watchers consider is the "theory of large numbers," the idea that as a market matures and a critical mass of users is reached, it gets harder to sustain early growth rates. Exacerbating worries about Internet commerce are concerns that the U.S. is entering into a recession that will curb consumer spending.

Worries about the Internet sector pushed down shares of high-profile companies: Baidu.com shares fell Tuesday by $3.21 to $231.60, Amazon.com dropped by $1.58 to $71.69, and eBay dipped $0.50 to $27.25.

Many analysts are still optimistic, however. "We believe the long-term growth opportunity for Net advertising and Search is well-intact," according to a research note from Mark Mahaney and James Safford at Citi Investment Research. Citi said there were several reasons for a decline in "paid clicks," among them an effort to reduce the number of times certain ads were shown. The purpose of the reduction, however, is to improve quality and relevance of searches and ads, Citi said, adding that in the long run, this will be a good thing for the company.

Internet market research firm Hitwise disputed the Comscore report, saying other data show that Web traffic from Google to retail sites is growing.

Nortel Networks rocked the telecom sector Wednesday when it announced job cuts and wider-than-expected losses due to soft carrier spending. Revenue in the fourth quarter was $3.2 billion, down by 4 percent from a year earlier. Nortel shares plunged by $1.52 to $9.93.

Sprint Nextel got hit Thursday when it reported a $29.5 billion fourth-quarter loss in the wake of problems with the Nextel acquisition. CEO Dan Hesse also warned of further subscriber losses in the tough mobile market. Sprint shares dipped $0.86 to close at $8.09.

Share prices in the tech sector since the beginning of the year have been depressed by recession worries. This week was no exception, as oil continued to hit $100 a barrel, and the Labor Department on Thursday reported that first-time unemployment claims rose last week by 19,000 to 373,000.

Dell on Thursday fanned fears of consumer spending declines, when it reported that net income for the quarter ending Feb. 1 dropped to $679 million from $726 million one year earlier. Within an hour after markets closed, Dell shares dropped by $0.43 to $20.39.

The IDG News Service is a Network World affiliate.