Can you envision a world without the Y2K computer bug?
Wall Street can. Now that the first half of 1999 is history, technology investors already are looking toward next year.
And here's what they see: Companies worldwide, no longer forced to plow money into year-2000-related computer repairs, go full-throttle to develop Web sites and sell products over the Internet.
"The dollars that are freed up from [Y2K] are going to go right into the Internet," said Ron Elijah, head of Elijah Asset Management in San Francisco.
That could be welcome news to holders of individual tech stocks and tech mutual funds, who already have enjoyed stellar returns in the first six months of 1999. Tech funds jumped 14.3%, on average, in the second quarter and are up a startling 34.4% year to date--more than three times the 10.8% gain of the average U.S. stock fund.
Though many companies have already spent considerable sums creating Web sites, much corporate attention and money also have been diverted over the last two years to dealing with the Y2K threat--the risk that many computers wouldn't recognize the 2000 date, triggering malfunctions or total shutdowns.
Now, assuming that most upgraded domestic computer systems make the transition to 2000--despite much debate, most experts believe they will--some professional investors foresee a huge spending push by corporate America on electronic commerce.
Why all the focus on Web sites and e-commerce? Because all sorts of bricks-and-mortar companies have become convinced that e-commerce is essential to reaching new customers and keeping old ones.
What's more, business-to-business e-commerce will expand significantly, experts say. For example, a company might set up a Web site for customers to send in orders and track the resulting inventory as it reaches their stores.
"It's a massive market," said Mark McCall, a money manager at TradeStreet Investment Associates, a unit of Bank of America. "It's a lot more than Amazon.com. All of corporate America is worried they're going to fall behind" in e-commerce.
Roger McNamee, general partner at technology investment firm Integral Capital Partners in Silicon Valley, said, "A decision to slow spending on e-commerce is a decision to lose market share."
The push into e-commerce is already evident at many major companies.
Consider Wal-Mart Stores: On Thursday it signed a deal for Books-a-Million (ticker symbol: BAMM), the country's third-largest bookstore chain, to supply books for Wal-Mart's expanded online store.
The emphasis on Web business is perhaps best illustrated by companies that have spent so much on it that their earnings have suffered.
Shares of Starbucks, for example, plunged 28% on Thursday after the coffee giant said 1999 profit would fall shy of estimates, largely due to spending on Internet ventures.
First Union, the nation's sixth-largest banking company, has twice cut its 1999 profit estimate, in part blaming the shortfall on the $150 million it is spending this year to develop an Internet bank.
Microsoft, Oracle Expected to Benefit
Which technology companies have the most to gain from this e-commerce spending windfall?
Start with the familiar software names, experts say. "Companies like Microsoft (MSFT) and Oracle (ORCL) will sop up a lot of the [post-Y2K] spending because they're big and they're paying attention," said Kevin Landis, co-manager of the Firsthand Technology Value fund.
Computer-networking and telecommunications companies also will benefit from the growing demand for faster Web access to speed e-commerce along.
Dave Barnard, a technology fund manager at the AIM mutual fund group in Houston, likes networking leader Cisco Systems (CSCO), telecom systems giants Lucent Technologies (LU) and Tellabs (TLAB), and online-access leader America Online (AOL).
Meanwhile, Barnard notes that AT&T; (T) has gobbled up cable giants Tele-Communications Inc. and MediaOne, in part because high-speed cable lines are key to bringing fast Net connections to consumers.
"They've transformed themselves in a very short time from Ma Bell to Ma Cable," Barnard said.
Web site developers and companies that help others use the Net to better manage their operations also should fare well, Landis said. He likes I2 Technologies (ITWO), which makes "supply-chain" software for companies to track production and distribution; Pervasive Software (PVSW), a Novell spinoff that makes software for creating Web sites; and Sterling Commerce (SE), which makes software that facilitates online transactions.
Among smaller Net companies, Barnard favors Inktomi (INKT), an Internet search directory company that makes so-called caching software that speeds Net access, and InfoSpace.com (INSP), which offers content such as stock quotes and news to Internet sites.
McNamee likes Exodus Communications (EXDS), which hosts Internet sites for large companies involved in e-commerce, and Viant (VIAN), a Net consulting firm.
Some Bumpy Times May Be Ahead
Despite the budding optimism about technology spending in 2000, however, many stock pros warn that the next six months could be rocky for the tech stock sector. It remains to be seen, for example, whether additional corporate spending on large computer projects might be halted or slowed until companies are safely into 2000.
"If 10% of [major companies] stop spending money for a quarter, that's a big deal" for many tech companies' earnings, McNamee said.
Because of those risks in the second half of this year--and because many tech stocks have rocketed anew just over the last month--many pros suggest that patient investors might see better buying opportunities later in the year.
"I'd anticipate a tremendous opportunity in technology in the fourth quarter because we'll probably have some earnings disappointments," Barnard said.
It's also important to note that not every tech company will be a winner in the post-Y2K world. Two groups, IT (information technology) consultants and ERP (enterprise resource planning) software makers, have been struggling for some time, and their recoveries may be a long way off.
Stocks of IT consulting firms got hot two to three years ago as predictions of Y2K fallout hit a fevered pitch. Investors piled in on the expectation that Y2K contracts would do wonders for earnings.
Profits soared, all right. But with the Y2K sunset in sight this year, investors fear the reverse scenario. For example, shares of Keane (KEA), a big IT consulting firm, neared $61 a year ago. They're about $21 today. Last week the company said 1999 profits would disappoint because of a slide in Y2K business and customers' unwillingness to spend on non-Y2K projects this year.
IT consulting companies are "faced with the year 2001 problem," Landis said.
Companies making ERP software face similar problems. These companies--including Oracle, PeopleSoft (PSFT), SAP (SAP) and Baan (BAANF)--make huge software packages that automate the manufacturing, accounting and personnel departments of big companies.
ERP companies were Wall Street favorites a couple of years ago when they were able to use Y2K fears to coax companies into massive software overhauls. But given that it takes 12 to 18 months to install an ERP package, customers backed off when it became evident the jobs wouldn't be completed by the millennium.
The outlook at some ERP companies will remain questionable next year, some analysts say. One big issue: ERP packages are expensive and some companies now question whether the efficiency they add is worth the cost.
The exception may be Oracle. Its shares are up 53% since announcing blockbuster quarterly earnings three weeks ago. Oracle has high hopes for its e-commerce software and so-called customer relationship management software for telemarketing and sales force automation.
Times staff writer Walter Hamilton discusses the day's market action regularly on the KFWB (AM 980) Los Angeles Times Noon Business Hour. He can be reached at firstname.lastname@example.org.
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Tech Stocks for 2000 and Beyond?
Increased spending on electronic commerce could benefit many software, Web site development and networking companies in 2000 and beyond. Here are some of the stocks favored by investment pros, with analysts' consensus estimated 1999 and 2000 earnings per share (EPS) and estimated annual earnings growth rates for the next five years. Stocks are listed alphabetically:
Est. 52-week Fri. Est. EPS 5-yr. COMPANY high/low price 1999 2000 growth America Online $175.50/$17.25 $115.25 $0.34 $0.56 51% Cisco Systems 67.06/20.56 67.06 0.74 0.92 29 Exodus Commun. 124.88/7.75 118.75 -1.95 -0.71 67 InfoSpace 72.63/9.75 49.13 -0.09 0.03 78 Inktomi 159.13/19.50 136.38 -0.44 -0.14 50 I2 Technologies 47.00/9.25 45.13 0.44 0.69 43 Lucent Tech. 70.75/26.69 70.69 1.19 1.45 23 Oracle 41.13/12.13 38.44 0.87 (1) 1.03 24 Pervasive Software 25.00/6.25 24.38 0.33 0.50 50 Sterling Commerce 48.00/20.13 36.19 1.59 2.02 28 Tellabs 70.63/15.69 70.06 1.26 1.59 29 Viant 36.00/19.75 35.00 NA NA NA
(1) Actual for year ended May 31
NA = Not Available
Sources: Bloomberg News, Zacks Investment Research
Top-Rated Technology Funds
Technology, communications and other specialty funds, ranked according to a system developed by The Times and fund tracker Morningstar Inc., are listed on S15.