TECHNOLOGY AND MARKETS : NEWS ANALYSIS : Techs’ Malaise: Routine Cycle or Signs of Deeper Trouble?
Technology stock investors started the new year the same way they ended 1995: in a mood to sell.
After a quarter in which many technology stocks saw their prices decline sharply, they took another beating this week. Warnings of poor earnings from industry stars such as Silicon Graphics Inc., whose workstations conjured up the lifelike dinosaurs of “Jurassic Park,” and Adobe Systems Inc., the software outfit that invented desktop publishing, set off a minor panic among investors.
Not only did Silicon Graphics and Adobe take a tumble, but their bad news tarred other technology outfits--many of which have little in common with either company. The Pacific Stock Exchange technology index, which posted a return of almost 300% on in-vestment for the five years ended last August, dropped 3.1% this week.
Technology stocks have been in favor with investors since 1990, and they’re likely to be in favor again. Many financial experts say a correction is only natural for the kind of run tech stocks have had, but others say crumbling prices reflect investor concerns about problems in the computer industry.
One fund manager, who declined to give his name, blamed this week’s drop on “momentum” investors--those who bought technology stocks because they perceived them to be “hot” but who knew little about the companies they were buying.
“Those are the people who tend to get spooked at the first sign of trouble,” he said. “And these are the people who know so little about technology that they can’t separate the Hewlett-Packards from the Netscapes.”
But the most common explanation for the ongoing decline is that technology stocks were just plain overpriced and that a correction was due.
“The market is just doing what the market does very well,” said Michael Sandler, a manager with the Clipper Fund, a $400-million-plus investment fund based in Los Angeles. “Many of these stocks had been pushed to unrealistic heights. The market eventually pushes prices back down to what they rationally should be.”
There are hints of deeper problems, however. Although Microsoft Corp. Chairman Bill Gates has called the Internet a gold mine and technophiles talk about the day when consumers will buy and bank via the Net, so far there are few profitable businesses based on it.
“With the Internet, a lot of people are putting their long-term hopes into the stock today,” said John Rohal, director of research for San Francisco investment bank Robertson, Stephens & Co.
Netscape Communications Inc., a Mountain View, Calif., start-up that makes software for browsing the Internet, was valued at $1.9 billion on its first day of trading in August, after only 16 months in business, $32 million in sales and not a penny of profit. Netscape shares closed Friday at $139.25 on Nasdaq, reflecting a current market value of a whopping $5.3 billion.
The troubling backdrop to this week’s decline in tech stocks is the fear among some investors that the personal computer industry has hit a slump. Holiday sales were weaker than expected.
Seymour Merrin, president of Merrin Information Services Inc., a Mountain View market research firm that tracks retail sales of computer equipment, said the reason is that fewer novices bought this year.
“Specialty computer stores, who tend to sell to the computer-knowledgeable, did fairly well, but the retailer, like the Circuit City, who sells a wide variety of products and who depends on the computer novice, didn’t,” Merrin said. “I had expected an increase in the 20% range, but it looks more like 12% to 15%.”
PC sales are becoming a commodity business, with little to differentiate products beyond pricing. Heavy discounting is likely to put pressure on companies, such as Apple Computer Inc., AST Research Inc. and Packard Bell, which are already subsisting on meager margins.
In the meantime, those who make PC components--semiconductors, monitors and disk drives--could face rough going.
Clipper’s Sandler said his company has stayed away from technology stocks for a decade.
“The problem with a lot of these companies is that they don’t have a long-term franchise,” he said. “We like investing in companies who are going to be around for 10 years or more and whose business will look better than it does today.
“With technology, a lot of companies do very well for a while and then blow up, and it’s extremely difficult to predict which ones will survive,” he said.
