Stardate 1981: Take Me to Your High-Tech Leaders
Imagine we’re back in 1981 and you’re trying to see the future of technology--not because you care how it works, but because you want to be rich.
Microsoft in 1981 is the fledgling dream of young Bill Gates and won’t have public stock for another five years. And even if you knew Bill Gates, you’d probably dismiss him as just another nerd.
But there is a lot of talk about robots. Robots in factories, robots in warehouses and, maybe 20 or 30 years down the road, even “Star Wars”-type C-3PO robots in our homes.
So when industrial robotics firm Unimation announces an initial public stock offering (IPO) in 1981, you’re first in line. The stock--with the ticker symbol RBOT--is offered at $23 a share, and soon rises as high as $28--a 22% gain, which, while minuscule compared to what Internet IPOs do today, is momentous in 1981. You think you’ve got the greatest technology stock of the 1980s.
Not quite. Unimation shares crumbled to as low as $10.75 in 1982. The company wound up selling out to Westinghouse in 1983 for $21 a share, or 9% below the IPO price you paid.
Robotics, in fact, never caught on as a technology investing theme, as an intriguing new report from Morgan Stanley Dean Witter details. The report chronicles the history of technology stock offerings between 1980 and 1998. Covering 1,243 companies, it is intended as a “historical perspective on wealth creation” derived from new tech industries, Morgan Stanley says.
At a moment in time when belief in technology--and technology investing--seems almost universal, the report also provides some fascinating data on the long-term payoff in tech stocks.
Some of that data is sobering. “Because of the inherent complications in understanding the promise or longevity of emerging technologies, investors often become too excited about the wrong things,” the report notes.
For example, relatively little stock market value remains in such once-hyped tech fields as robots, superconductors, navigation equipment and electronic games.
By contrast, software stocks, in total, were worth a stunning $674 billion as of Jan. 31, Morgan Stanley calculates. (Microsoft alone accounted for $433 billion of that.)
Not surprisingly given the mania of the last year, Internet-related stocks have already created more value for their shareholders than most other tech sectors have created in nearly two decades.
Led by America Online, “pure” Internet-related stocks were worth a total of $257 billion as of Jan. 31, Morgan Stanley figures. Close behind were data-networking stocks--the infrastructure of the Net--at $253 billion.
Those sectors now have surpassed the post-1980 personal computer IPOs, whose shares were worth a total of $224 billion.
But are investors “too excited” about Net stocks today, the way they once were (relatively speaking) about some robotics, gaming and laser-related stocks?
Many Wall Street pros look at Net stocks’ prices versus underlying earnings potential and argue that the stocks are absurdly valued.
The increase from the $21-billion initial value of all pre-1999 Internet stock IPOs was 1,126% as of Jan. 31, as measured by the stocks’ market capitalization (stock price times number of shares outstanding).
That’s a huge rise. Yet, at that point it was still below the long-term market-value increases generated by IPOs in such sectors as personal computers (7,142%), computer networking (2,291%) and computer workstations (1,681%).
The Net stocks’ gains might be understated, however, because their market values have been so large from the get-go, as the stocks have rocketed on their first trading days--far exceeding how PC, software and other tech stocks performed in IPO eras past.
In any case, Morgan Stanley offers what has become the boilerplate line of most analysts who are following the phenomenon of the Net: “Many Internet stocks, and perhaps most, will prove to be seriously overvalued, but not all,” the report opines.
Some hard numbers in the report help put technology investing in general since 1980 in perspective:
* Just 5% of the tech stocks that went public between 1980 and 1998 were responsible for 86% of the total rise in shareholder value of all tech shares in that period.
Those names, as you might assume, include Microsoft, Cisco Systems, Dell Computer and America Online.
In other words, few tech stocks turned out to be mega-superstars, and those that did, accounted for the bulk of the success in their industries.
To look at it another way, “you’ve got to kiss a lot of frogs before you find a handsome prince” in Tech Stock Land over the long term, the report says.
But then, in which industry isn’t that true?
* Of the 1,243 tech stocks in the study, Morgan Stanley estimates that 718, or 58%, have risen in value from their IPO dates, including those that were acquired by other companies at a premium to their IPO value.
That means 525 of the stocks, or 42%, have been losers for investors who bought the IPO, assuming those investors bothered to stick around. Of the losers, 96 (8% of the 1,243) no longer exist because they went bankrupt or were delisted or recapitalized.
One might easily argue that the overall batting average of winners is impressive for what everyone knows is an extremely high-risk industry. Robots and lasers didn’t pan out as investment themes, but an awful lot did in the software, computer, networking and semiconductor fields, to say the least.
More evidence of that: The average technology stock mutual fund rose 1,170% in the 15 years ended March 31, versus a 733% rise for the average general U.S. stock fund, according to Lipper Inc.
* Despite the surge in the number of tech IPOs in recent years, the tech sector has not sucked up the majority of capital invested in IPOs--at least, not before this year.
In 1998, for example, 90 tech IPOs (which don’t include health-care issues) raised $5.6 billion. Non-tech IPOs (there were 202) raised $29.3 billion, or 84% of the total IPO sum for the year.
Tech’s 16% share of IPO financing last year was the lowest since 1994 and was far below the percentages of the early 1980s, including the personal-computer-related IPO boom year of 1983.
So what? So maybe the tech “mania” isn’t as manic as many people think. (Secondary observation: There is a lot of money out there looking for IPOs, period.)
One inescapable conclusion from the Morgan Stanley report is that astounding investor value has been created in the technology business over the last 20 years. The tendency for Wall Street’s bears is to argue that much of that value represents overvalue--that the stocks just aren’t worth their current prices.
Maybe. But who believes that the massive base of technology now in the market is somehow going to shrink in the years ahead--that we’re going to use less technology as opposed to more?
For investors, the issue isn’t that technology might be peaking. The issue is picking the companies that will provide the innovations that take the business to its next level.
Those may be the current market leaders, or they may be a new crop of companies whose value is still underestimated, rather than overestimated, in the market.
How to pick tech winners in their early stages? The Morgan Stanley report includes this checklist from Don Valentine, a well-known tech venture capitalist:
* Find “monster” markets that can be really big, like a computer on every desk--all of which will be networked with one another.
* Stick with good technology that can stay ahead of competitive threats.
* Find outstanding management teams capable of driving their technologies forward.
It sounds simple enough, but of course it isn’t--or we’d all be as rich as Bill Gates.
The alternative approach of many investors is to simply stay with today’s tech behemoths, including Microsoft, Dell, Cisco and AOL, buy more when the stocks periodically tank and hope for the best.
History says there are a lot dumber things you can do.
*
Tom Petruno can be reached by e-mail at tom.petruno@latimes.com.
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Where Tech Wealth Has Soared
Software companies that made their initial public offerings (IPOs) between 1980 and 1998 now are worth $674 billion in total, marking the largest creation of market value of any tech sector in that period. But in terms of the growth of the stocks’ initial value, IPOs of personal computer stocks in 1980-98 have recorded the largest increase in value, at 7,142%. Data on tech IPOs, 1980-98, by sector:
*--*
Mkt. value Mkt. value at IPO, at 1/31/99, Pctg. rise from Sector in billions in billions initial IPO value Software $48.4 $674.2 +1,292% Internet 21.0 257.5 +1,126 Networking 10.6 253.4 +2,291 Personal computers 3.1 224.5 +7,142 Telecom equipment 34.9 204.8 +487 Tech services 29.9 112.3 +275 Computer peripherals 16.2 99.2 +512 Semiconductors 15.6 92.1 +490 Workstations 2.7 48.1 +1,681 Electronic mfg. services 2.6 24.5 +842
*--*
Note: Market value at Jan. 31, 1999, factors in acquisition value of companies taken over since IPO.
Source: Morgan Stanley Dean Witter
Tech’s Share of IPO Capital
Despite popular wisdom, technology stocks’ initial public offerings haven’t grabbed the lion’s share of capital allocated to IPOs in recent years. In fact, tech IPOs accounted for just 16% of the total IPO market last year. Tech’s percentage of IPO dollars raised each year:
1998: 16%
Source: Securities Data Corp.
