Making sense of the tech meltdown on Wall Street

Despite the inscrutable language people often use when talking about the dynamics of the high-tech market, predicting when the industry is about to run into trouble isn't that difficult.

Here's how you do it: Start with companies like Applied Materials that make chip manufacturing equipment; when their orders are down, that means the chipmakers like Intel, Advanced Micro Devices, and Texas Instruments figure they don't need to increase their manufacturing capacity. That, in turn, means the PC and server makers are seeing demand slip. That means demand for consumer electronics and consumer software is also going to slip.

As the big guys run into trouble, the start-ups that haven't turned a profit will disappear, either into the arms of another company or into bankruptcy. Finally, the big corporate software makers like SAP and Oracle--the last refuges of tech investing--will take their hits as buyers put off long-term software projects.

At least, that's how it usually works.

(Credit: Susan Dove/CNET Networks)

The formula may have been turned upside down Monday, with the big tech stocks leading the way into the cellar. CNET's Technology Index, which tracks 66 publicly traded tech companies, dropped 4.08 percent to 1,276.67 Monday, its lowest close in more than two years. And it could have been worse: At one point in the day, the CNET Index was at its lowest point since May 2005. A late rally brought some stocks back just before trading ended. The drop in the CNET Index was similar to a 3.08 percent drop in the Dow and 4.34 percent decline in the Nasdaq index.

Don't blame the start-ups for this one, though they may end up suffering the most for it. The tech crash Monday was led by one of the most sober names in tech, German corporate software maker SAP. SAP announced Monday that it would miss third-quarter expectations, sending its stock into a tailspin. SAP shares closed at $39.68 per share, down 13.08 percent for the day and a new 52-week low. (For more on Monday's meltdown, check out CNET TV's Daily Debrief.)

The rest of the enterprise software industry went down with the Germans. Shares at archrival Oracle closed the day down more than 6 percent to $18.30 per share. On-demand software provider Salesforce.com saw its shares drop 2.81 percent to $40.40 (a 52-week low) on both the SAP news and an analyst's report that intimated that demand may be slackening.

Among big Internet companies, the news wasn't much better. eBay led declines, with shares down 5.54 percent to $17.89 per share at the end of the day. That's more than $1 below the company's previous 52-week low. eBay said it was laying off 1,000, but, oh yeah, was still flush enough to spend more than $1.3 billion on three acquisitions. Google dropped 4 percent to close at $371.21, also a new 52-week low. And Yahoo ended the day down 4.31 percent to $15.31 per share, yet another 52-week low. (That kaput Microsoft offer must be looking awfully nice to some aggravated investors right about now.)

SAP and other enterprise software companies aren't supposed to be leading indicators for the tech industry--they're usually laggards. During the dot-com boom, big software companies like Oracle and SAP were among the last to fall victim to the downturn. At one point, Oracle CEO Larry Ellison surveyed the tech industry wreckage and enthusiastically speculated whether his company was counter-cyclical. (The idea was, companies would invest in Oracle software to save money through automation.)

Turns out, Oracle wasn't counter-cyclical, nor was anyone not in the business of auctioning abandoned dot-com office supplies.

A case of the jitters
So what happened Monday? Though it's been in the making for some time, the speed at which the financial industry has unraveled has been stunning, and its impact on spending plans at big corporations is likely significant. SAP was particularly vulnerable because of the way enterprise software is typically sold--in a rush at the end of the quarter. The quarter that just ended, unfortunately, happened to coincide with the near-collapse of the American banking system.

So what about all those tanking Internet stocks? So far, the sell-off appears to be based more on fear than reality. eBay said it would come in near the bottom of its earnings expectations, and there's been no word so far out of Yahoo and Google. But investors clearly aren't thrilled with eBay's acquisitive ways in the face of a bad economy, and they're worried about online advertising slowing down. Netflix had bad news, too, casting doubt on online consumer spending heading into the holiday season.

There are other question marks before we can really make sense of what happened Monday. Shares of Apple, for example, were down as much as 7 percent at one point in the afternoon, but ended the day up 1.1 percent at $98.14 per share (that's about $4 above Apple's 52-week low). But Apple was one of only seven companies on the CNET Index to see gains for the day. Other big companies like Microsoft, Intel, and Cisco Systems saw significant losses.

Companies that aren't as reliant on selling multimillion-dollar software at the end of the quarter (and instead rely on lower-priced items sold more evenly through the quarter) aren't likely to see an impact from the souring economy quite as quickly as SAP. But they won't avoid it for long, with consumer confidence slipping and unemployment rising. Translation: the results of the current quarter will unquestionably be the most closely watched numbers since the tech industry crawled back from the dot-com bust.

People say SAP is indicative of the health of corporate software sales. But the rest of tech should hope it's not a canary in the coal mine for the entire industry.