Market Spotlight: Small Tech Stocks

"The old saw 'You don't get fired for buying from IBM' rings even truer during uncertain economic times," wrote Jefferies analyst Katherine Egbert in a recent note to investors. She predicts that this will be a tough year for "small companies selling into declining IT budgets."

Historically, tightening spending has a disproportionate effect on small firms, she says, partly because their business customers become less willing to gamble on new technologies.

Investors are also taking heed. Shares of recently public tech outfits such as Sourcefire Inc., Bigband Networks Inc. and Limelight Networks Inc. are trading far below their IPO prices. Earlier this month, Sourcefire's shares hit their lowest level since their $15 public debut last March. On Monday, they were up 14 cents, or 2.3 percent at $6.26 in afternoon trading.

The Columbia, Md.-based provider of network security products has many large competitors, including Cisco Systems Inc., that are more likely to prosper during spending cutbacks, Egbert says. Companies like Cisco and Hewlett-Packard have more customers, a wider range of products and a broader geographic reach, so they are more insulated in a downturn than a small company who may depend on just a few customers for its revenue.

However, even larger companies are feeling the slowdown. Cisco, by far the world's biggest networking gear supplier, spooked investors late last year when it predicted slower sales growth, and earlier this month it gave a disappointing third-quarter forecast. Even so, Cisco has a broad range of customers, the majority of which are overseas, which help insulate the tech bellwether from a U.S.-led recession.

Hewlett-Packard, meanwhile continues to prosper. Its fiscal first-quarter results and upbeat outlook last week impressed investors that were worried about a possible recession.

"No tech company is immune to a spending slowdown, but HP has the most customer and geographic diversity in our group and continues to have economically-independent cost cutting levers," said Goldman Sachs analyst David C. Bailey in a recent note to clients.

The biggest danger for smaller outfits is that they may have a very narrow, niche customer base, said Toan Tran, equity strategist at Morningstar. If one company accounts for most of their revenue, any spending cutbacks could mean revenue losses.

San Francisco-based data services provider Riverbed Technology Inc. may be an exception. Analysts see strong prospects for the company a top provider of wide-area network optimization technology, which helps improve the performance of applications shared over computer networks.