Networkers’ Stocks Come Unplugged; 3Com Hit Worst
Shares of high-flying computer networking companies plunged dramatically Monday as investors bet that the frenzied expansion of both the public Internet and private “intranet” computer networks is finally beginning to slow.
Leading the decline was Santa Clara, Calif.-based 3Com Corp., whose value plummeted 27%, or $13.50, to $37.25 after Chief Executive Eric Benhamou warned analysts that earnings growth in the final quarter of last year will be less than expected.
Shares of Cisco Systems, Cascade Communications, Bay Networks and Ascend Communication also declined Monday, extending a sector-wide sell-off that began two months ago and picked up steam last week. Cascade is now trading at $35, down from a peak of more than $90 in October, and Ascend has fallen by nearly one-quarter over the last month.
Dramatic though the price declines have been, analysts do not read them as indicating any fundamental long-term problems in the networking business. Rather, they are a reaction to the extraordinary heights the stocks reached at their peak. Cisco, for example, was valued at about $45 billion, the same as Hewlett-Packard Co., which had 10 times more sales.
And the stock movements also represent a recognition by investors that networking firms, like many other technology stocks, are subject to extreme up-and-down cycles.
Benhamou of 3Com, for example, said slower growth at his company--which mainly makes networking products for PCs--was due to the slowdown in the PC market as a whole.
“The [networking] market has grown so much it is no longer immune to things like macroeconomics and PC transitions,” Benhamou said. “There was a time when no matter what happened, the industry went like gangbusters. That’s no longer true.”
The networking companies’ shares took off two years ago as analysts recognized the value to corporations of building corporate intranets to share information within the company and to access the Internet. Consultants put out reports suggesting that companies could get a return on such computer network investments in as little as two months.
But after an exhilarating boom, networking shares started to weaken last summer along with many other Internet stocks. Business remained very strong, with most analysts pegging networking equipment growth at 30% to 50% annually, but the difference between the top and the bottom of that range is large for companies trading at very high levels relative to actual earnings.
Some observers are a little worried about the fundamentals. They fret that Internet service providers--big network industry customers--are having trouble making money at the current going rate of $20 a month for unlimited service. Unless a better business model emerges, big players like the telephone companies may be reluctant to move ahead on their ambitious plans for providing Internet services.
As a growing portion of the networking companies’ sales come from overseas, the industry is subject to hard-to-forecast economic in Europe and Asia, as well as currency risks. And a prolonged PC industry slowdown would certainly hurt.
Still, most analysts remain bullish on the long-term prospects of the sector. In the critical corporate market, where companies are building increasingly powerful networks so they can run their businesses more efficiently, there is little sign of a slowdown.
Benhamou of 3Com says his largest corporate customers remain committed to making large network investments.
“In the core infrastructure area, we see no weakness at all,” he says. “There is strong demand for projects around the world.”
Cisco, which makes specialized computers called routers to steer traffic around the Internet and intranets, reported its sales rose 73% to $1.59 billion in the quarter ended Jan. 25.
In-Stat, a Scottsdale, Ariz.-based market researcher, expects the networking market to climb to $64 billion by the year 2000, from $28.9 billion last year.
Even the much-publicized congestion problems of some Internet providers has a silver lining. America Online said last week it would spend as much as $350 million on networking equipment after heavy complaints from subscribers who were getting busy signals.
And with the old-line telecommunications companies such as Lucent Technologies nowhere to be seen in the rapidly growing new business, most believe the leading networking companies will continue to reap the harvest.
Some analysts say the stocks have fallen so much that there are now good buying opportunities: Cisco, for example, is now trading at a relatively reasonable 20 to 28 times earnings, depending on whose numbers you use.
“We think the stock is dramatically oversold,” said Therese Murphy of Smith Barney.
But nobody’s guaranteeing the stock won’t drop a lot more first.
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Networking Lower
Shares in companies that make computer networking equipment soared as the Internet boomed, but somewhat slower growth in the sector is bringing them back to earth. Monthly stock closes and latest for 3Com, Cisco Systems and Cascade Communications:
Monday:
3Com: $37.25, down $13.50
Cisco Systems: $58.00, down $5.125
Cascade Communications: $35.00, down $1.81
Note: All shares trade on Nasdaq.
Source: TradeLine
