This year has proved dismal for most investors in Irish technology stocks. Recently, the slowdown in the US technology sector has spread to other regions, including Europe. This trend contributed to the poor performances this week of both Baltimore and Horizon and resulted in over 300 job losses within both companies. With no sign of a recovery in IT spending, the worst may not be over. Despite this, there are opportunities for investors in Irish technology stocks, depending on your appetite for risk.

For a time, it appeared that the slowdown in the IT sector was confined to the US market. Europe was viewed as being behind the US in terms of the adoption levels of newer Internet technologies, and thus spending was likely to continue growing at a faster rate. Over the past two months, however, there has been increasing evidence that European demand may be slowing. Statements from Sun, Cisco and Hewlett Packard outlined or forecast shortfalls in earnings because of lower European demand. This week it was the turn of the Irish-based IT companies to report the impact of the slowdown. Horizon cited a significant slowdown in demand in Britain over the past two months as the primary reason for the downward revision of estimates. Baltimore also attributed some of its revenue shortfall to the 10 per cent decline in revenues from Europe during the first quarter of the year. The outcome was inevitable: cost-cutting measures were introduced, which mean job losses. European strength had been held out as a reason why further declines in IT earnings might be limited. With Europe now showing signs of weakness, does this imply another round of profit warnings? The answer is yes, but not specifically because of Europe. Over the past year, there has been an endless cycle of profit warnings from IT companies, which has resulted in a decline of almost 60 per cent in the S&P Technology Index. Over the same period, the market's expectation for earnings growth for 2001 from the sector has declined from a positive of 23 per cent in March 2000 to a negative of 27 per cent currently, a 50-point swing. Growth expectations for 2002 have also been declining but not by as much. The market still expects S&P Technology sector earnings to increase by 28 per cent in 2002. With no sign of a US recovery and other markets showing signs of weakness, this is a very optimistic target. If (when) 2002 earnings forecasts are cut, the result will be further weakness in the IT sector. So what does this mean for Irish technology stocks and their investors? The answer varies, depending on the stock. Within the overall technology market, sectors and stocks with good business models and strong fundamentals will perform well. Irish technology companies are subject to the same conditions. The best-performing Irish technology stocks are likely to be those with secure earnings, i.e., have not had or are least likely to have a profit warning. Riverdeep, an e-learning company targeting the US education sector, stands out in this regard benefiting from strong growth in revenues driven by US government spending on education. This is unlikely to change, particularly with the emphasis now being placed by the new US administration on education.

Iona also has proved to be very stable in terms of earnings, reporting strong growth in revenues and profits (yes, a high-tech company that actually generates profits!) in its recent first-quarter results. The stock price, however, has not mirrored this stability and now looks underpriced relative to its peers as well as its growth rate.

For the value-oriented investor, Horizon looks attractive following its sharp decline this week, although it may take some time to realise this value. At #2, the company is now trading at just nine times its 2002 (revised) earnings forecast, despite the fact that earnings are still forecast to grow by 23 per cent per annum over the 2000-2003 period. For the more risk-loving investor, Baltimore and Trintech provide opportunities. Both companies have strong reserves of cash to finance growth for a number of years - and there is always the possibility of a takeover. Roller-coaster enthusiasts only please!

With no signs of a recovery in IT spending, further falls in the technology market are likely as profit forecasts decline. In this context, further profit warnings and job losses from some Irish high-tech companies are inevitable. The difference between now and the start of the year, however, is that the share prices have already discounted a lot of the bad news. Thus while there may be some opportunities to invest with varying degrees of risk, the old rule applies now more than ever - caveat emptor.

Barry Dixon is technology analyst at Davy Stockbrokers