Computer Firms Set the Pace of Stocks’ Decline
Technology stocks led the way in Monday’s market plunge, as emerging signs of weakness in the computer industry punctured a bubble that many analysts said had swelled to untenable proportions.
Shares of PC makers, software creators and ballyhooed Internet start-ups dropped sharply, and some analysts said there was plenty more room for the market values of some technology companies to shrink.
Analysts divided the industry into two categories: the proven hardware and software makers that have powered PC growth for five years but could be slowing down, and the swollen ranks of neophyte companies riding the hype of the Internet.
Fred Hickey, editor of the High Tech Strategist newsletter, pointed to companies such as Amazon.com Inc., an Internet bookseller whose lack of profits hasn’t kept investors from boosting its stock to soaring heights.
“Amazon.com went public and just kept rocketing higher,” Hickey said. “But what do you pay for a company that won’t make any money for years, is in a price war where books are being sold below cost and is competing with Barnes & Noble?”
Such companies were hit hard Monday. Amazon.com watched its stock plunge $9.06, to $51.25. Shares of Yahoo Inc., the Internet’s leading navigation service that has posted paltry earnings but has a market cap of $1.63 billion, fell $9.56, to $38 per share.
“The overvaluation is in the area of the Internet--the Yahoos and Excites,” said Michael Murphy, editor of the California Technology Stock Letter. “That to me has been a mania that needs to be corrected, but it didn’t need to go ripping through the PC side of the business.”
The dam started to break several weeks ago, when longtime industry heavyweights started reporting disappointing results. Intel Corp., for example, announced disappointing third-quarter results and warned that the fourth quarter--typically the industry’s best--was not likely to be better.
That sent chills through the investment community because Intel, whose chips power 85% of the world’s computers, is regarded as a bellwether for the industry.
In fact, many analysts said that despite some warning signs, the fundamentals of the computer industry remain solid. According to Dataquest, the number of PCs sold worldwide, for example, is projected to rise by 20% in 1997, compared with 14% in 1996.
“Nothing suggests this correction is required for fundamental reasons,” said Roger McNamee, general partner in Integral Capital Partners in Menlo Park. “There were some high-visibility companies that missed their September quarter, but on average the numbers were very good.”
In fact, Compaq Computer Corp. reported third-quarter results that were better than analysts had predicted. But the company’s stock was still buffeted Monday, closing at $60.50 per share, down $8.25.
There are some troubling signs in the computer industry, including a dramatic shift in the market toward lower priced machines.
The sub-$1,000 category is the fastest-growing component of the computer industry. That helps explain why even though PC shipments are up 20% in 1997, according to Dataquest, revenues are up less than 10%.
The trend underscores the fact that advances in hardware are outstripping improvements in software, analysts said. Put simply, computer users don’t need the latest microprocessors because older and cheaper machines are running the latest software just fine.
Intel has felt that pinch, because its fattest profit margins are on its most expensive microprocessors used in high-end PCs.
Surprisingly, Apple Computer, which reported a quarterly loss of $161 million on Oct. 15, was the only stock on the S&P; 500 to post a gain. Shares of Apple closed at $16.75, up 18.75 cents on Nasdaq.
