Will Tech Stocks Rebound?

Will the carnage in technology stocks end this week?

The shares took a beating again Friday after more big technology players posted earnings that came up shy of Wall Street’s expectations, which prompted investors--many of whom were sitting atop big paper profits on the stocks--to sell off.

Although the slide in tech stocks was unnerving and helped drag the whole market lower, analysts said the declines mainly reflect specific, transitory events at each company--and not a significant erosion of the firms’ basic businesses.

Leading the latest pullback was Sun Microsystems Inc., the Palo Alto-based maker of powerful computer workstations. The stock tumbled $3.94 a share, to $38.38, in heavy trading on Nasdaq after Sun reported its fiscal first-quarter results late Thursday.

Another casualty was Seagate Technology Inc., a maker of data-storage disk drives that plunged $5.31, to $32 a share in New York Stock Exchange composite trading, after posting a fiscal first-quarter loss of $240 million Thursday.

Their weakness helped pull other tech stocks sharply lower Friday, including IBM Corp., Dell Computer Corp. and Intel Corp.

And the tech stocks will be tested again this week, when IBM and Microsoft Corp. are expected to release their third-quarter results.

The technology companies have been posting third-quarter results that in many cases showed big gains--at least from their basic operations--but still fell short of Wall Street’s often bullish forecasts.

That’s prompted investors to sell and analysts to start scaling back their forecasts for the companies, even though the analysts rely heavily on the companies’ own comments when they mark up their profit estimates.

But the companies certainly aren’t taking the blame for how investors respond. “From our perspective, the market has totally overreacted to technology earnings reports, not only Sun’s,” said Sun spokeswoman Susanne Vagadori. “We’re still looking forward to a very healthy fiscal-year 1998.”

In many cases, it’s not that companies are suddenly burdened with a serious slowdown in business, it’s that “expectations were too high,” said Stephen Smith, a computer analyst at PaineWebber Inc. in New York.

To be sure, the companies are struggling with certain problems. Sun Microsystems was hurt by the strong U.S. dollar’s impact on its overseas results and stepped-up competition in some of its markets.

Seagate, meanwhile, is also battling increased competition, especially in the market for its powerful high-end drives, said James Porter, president of the research firm Disk Trend Inc.

“The disk drive industry is not in terrible shape, but one of its leading players [Seagate] ran into a bunch of good competitors,” Porter said.

But overall, “I don’t see fundamental changes on the technology front” in terms of business prospects, said Michael Gazala, an analyst at the consulting firm Forrester Research Inc. in Cambridge, Mass.

The field of fast-growing technology stocks--in which the firms frequently produce eye-popping sales and profit gains--is always volatile when there’s just a hint of a slowdown in the companies’ results.

Also, a tech stock often will slide on an earnings announcement if only because investors previously had bid the shares higher in anticipation of the report--and then they dump the stock when the earnings are announced in order to lock in their own profit.

Consider what happened to Compaq Computer Corp. last Thursday. The PC maker reported a 54% surge in third-quarter profit, which surpassed Wall Street’s forecasts, and it declared the first cash dividend in its 14-year history. Yet Compaq’s stock plummeted 9%, and then lost an additional $3.75 a share, to $69.50, on Friday. Even so, Compaq has more than doubled since late April.

Indeed, investors’ urge to dump tech stocks at any sign of trouble is even more pronounced these days, because technology shares have outpaced the rest of the market in recent months. Between mid-April and mid-October, the tech-laden Nasdaq composite index jumped ahead 42%, compared with a 28% gain in the Standard & Poor’s 500-stock index.

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Times staff writer James F. Peltz can be reached by e-mail at james.peltz@latimes.com

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Tech Tumble

Technology shares hae fallen sharply in the face of disappointing earnings reports by some major players. Here’s how one tech index fared:

Friday close: $169.09Source: Lehman Bros. Select Technology Index