Tech-led Turnaround?

Well, I don't know whether or not to call it a turnaround, but I do think there will be an influx of money going into technology soon. While the energy and materials sectors are the only ones that are seeing any signs of life this year to date, investors are looking for the stocks that could be bargains in this year's second half.

I think technology is where you will see the first gains outside of energy and materials. However, this won't necessarily signal a turnaround. Technology will perform well relative to the rest of the market because companies are looking for productivity-enhancing products and services. Technology companies can offer this.

Since this is a blog about internet trends, let's explore what Google has to offer in this capacity, as well as others that are important to current economic conditions:

First of all, as many have already pointed out, Google's AdWords advertising system offers a more accountable form of advertising toward which advertisers tend to flock during economic downturns when marketing budgets tighten up.

Also, within the paid search market a larger player like Google will tend to do well, as advertisers will be more likely to take focus off of secondary players before considering scaling back on Google ads.

These conjectures are not entirely untested. The U.S. economy grew at measly rate of 0.9% year over year in Q1 2008. Nonetheless, Google greatly exceeded Wall Street's projections, both the latest revised ones and the original ones that were higher. Google posted good growth domestically, as well as stellar growth internationally.

On that note, the international exposure of Google (as well as many large multinational tech companies) is also a way the company will shine in current economic conditions. Google's brand power is just as potent internationally as it is in the U.S. In Q1 Google's international sales surpassed its domestic sales for the first time in the company's history.

Many point to the favorable conversion rate that Google receives from these international sales, but let's not underestimate the growth story in other countries. As e-commerce markets develop in other countries, Google's sales growth will likely reap the benefits. For example, China's e-commerce market is in a state of infancy. When growth starts to accelerate and the market starts to mature, Google will have a huge new source of revenue, assuming they continue to gain market share in China.

For another example, Latin America is Google's highest-growth region. Having lived in several Latin countries, I understand the brand recognition in these countries. People hardly use any of Google's peripheral web services, but almost everyone uses Google for search. Similarly, Google will reap the benefits of economic growth in Latin America as the internet starts to mature with the expansion of the Mexican, Brazilian et al. middle classes.

OK, now back to the original point. Technology will likely perform well relative to the rest of the market during this downturn. Also, as we come out of the downturn, the best-performing tech companies that have eaten up market share stand to benefit the most. Within technology, there are some companies with healthy balance sheets that have been taken down in the first half of 2008 with the larger market. Much of this is unwarranted. For example, Google lost 3.5% today on a record hike in crude oil prices. Companies like Google, which are not as directly exposed to oil prices, should not experience the same dips as the larger market due to spikes in oil prices. Even further, if Google and other tech companies truly drive productivity, they stand to benefit in certain ways from a struggling economy due to higher energy prices.

So, this doesn't point to a tech-led turnaround, but rather good tech performance during the downturn. Even though technology will likely perform well coming out the of the downturn, too, it will be the recovery of other sectors that actually drives new economic expansion.