Technology Is No Mere Sector--It’s Our Bedrock
Technology companies sent the stock market diving and rebounding like a kid on a bungee cord last week, frightening investors and making them wonder whether their mutual funds should have so much riding on a sector that’s often called speculative.
The tone of the market was set by Intel and Microsoft, well-known but not very large companies--roughly 50,000 employees and $16 billion in sales between them, a patch on any of the automobile companies or computer giant IBM.
Yet they are among the most widely owned stocks in America right now, chief repositories of the hopes and calculations of professionally managed pension and mutual funds. When they faltered, stocks ranging from IBM to Cisco Systems joined in the tumble.
Another case of the market as Big Casino?
No--a byproduct of healthy, dynamic development.
We should realize that technology is not a mere sector in the economy, nor is it speculative. It’s the economy’s bedrock. Semiconductors, computers and software--the chief components of the information industry--now employ more workers than any other business, including automobiles and auto repair.
If telecommunications companies are added to the technology universe, as they should be, information’s dominant role in the U.S. economy is absolute.
It is a universe of rapid change in which stars scramble constantly to bring out new products and seek new market positions.
Ironically, companies moving to stay ahead sparked last week’s stock gyrations. Intel said it will incur higher expenses and investments to develop new kinds of chips with software built in, much as ignition, gear shifting and other functions were built into car engines long ago.
Meanwhile, Microsoft warned analysts that expenses for launching Windows 95, the advanced version of its operating system, would hold down earnings gains.
IBM also cautioned that its profit gains would be lower for the rest of this year, even as it reported dramatically higher income in the second quarter.
“Margins are thinning because competition is heating up for everybody,” says consultant Bob Djurdjevic of Annex Research in Phoenix. “We could see this pattern continue until June, 1996.”
The cycle of expansion and retraction is normal, says Michael Gianturco, an investment manager and author of “The Market That Beats the Market,” a book on technology stocks. Like new industries in ages past, tech stocks should be measured with different yardsticks, Gianturco argues.
“Consider buying technology stocks in the neighborhood of 21 times earnings,” he writes. That’s 50% higher than the average price-earnings ratio for companies in traditional industries. Technology’s headlong growth justifies the premium, Gianturco says.
Such talk is easy for experts, but it is almost impossible for ordinary investors to dope out future winners amid all the change in the information industry. So what should such investors do?
They should look away from technology’s flashing lights to the adaptability of companies--should ask themselves, that is, where the company might be five or 10 years from now.
Examples are humbling. Last week also saw the final departure from television manufacturing of Zenith Electronics, the 77-year-old developer of the portable radio and color picture tube. Elegies to Zenith were written and broadcast. But colder analysis might have asked why Zenith stayed so long with an old technology like TV?
Another Chicago-born company, Motorola Inc., sold its TV set operations 21 years ago--not because of overseas competition, but because TVs had become a commodity. With surplus production everywhere, pricing power was in the hands of mass retailers; profitability had vanished for manufacturers.
So Motorola, which started in car radios, moved instead into cellular phones, which use a lot of its semiconductors. Now it is building a global satellite telecommunications network. Its stock has quintupled in the last decade, but grew strongly in every previous decade as well.
That Motorola is setting up a telecommunications network indicates how much of a free-for-all that field is becoming. And the real crunch will come in the next several years as the regional Bell operating companies are freed from regulation, says Peter Bernstein of Infonautics Consulting, a Ramsey, N.J., firm.
Ultimate outcomes depend not on technology but on competitive adaptability. Only a decade ago, Sprint Corp. was a rural telephone company in Kansas named United Telecommunications. But in 1984, as AT&T; was breaking up, United borrowed money and built a digital, fiber-optic, long-distance system.
Yes, Sprint is third in U.S. long-distance today, with about 10% of the market. But it is profitable and expanding because it offers custom communications to large corporations and has made strategic alliances with cable companies in the United States and with the German and French government phone companies.
Sprint may not survive the shakeout of the next several years. But it can profitably become part of another company. That bold 1984 investment in fiber optics gave the rural phone company chips to continue in the global game.
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What of the main actors in last week’s market drama? Will Microsoft dominate the information industry? The competitive genius of the company’s chairman, Bill Gates, and the fact that it now plans to spend 17% of each sales dollar on research and development say it will be a force to reckon with.
But dominant? Perhaps not. IBM, with newly acquired Lotus Inc., will fight it in software, and Justice Department scrutiny of every move Microsoft makes will cut its margins.
IBM remains a question; engineers inside the company worry that financial restructuring is trimming back R&D.; Financial restructuring alone won’t make a company successful, but IBM’s alliances with Lotus and others could broaden its future.
Intel, like Microsoft, continues to increase R&D;, because it has a vision of where all the technology is taking us. Where? “Toward the personal computer as the universal information device,” says Andrew Grove, Intel’s energetic president--just as the car became the universal transportation device.
Such visions and prospects are typical of new industrial epochs. Some 125 years ago, steel and railroad stocks were as volatile as technology is today; likewise automobile and oil stocks in the early 20th Century. Those earlier dawns made the fortunes of Andrew Carnegie in steel and J.P. Morgan, who bankrolled steel. Later it was John D. Rockefeller in oil and Henry Ford in cars.
And today it’s Bill Gates and probably a player to be named later. That the ultimate winner could still be waiting in the wings is what makes technology stocks so attractive and yet so volatile.
