Angst Over Tech Outlook Grips Investors
Wednesday’s broad retreat in blue-chip technology stocks reflects some troubling developments over the last few days that have many investors wondering whether long-term prospects for the tech sector have suddenly turned gloomy.
“A lot of people are scared,” said Sudeep Balain, a technology analyst at investment bank Chase Hambrecht & Quist in San Francisco. “They have gotten in at the tail end of the market, the last two months. . . . The sentiment out there is pretty negative.”
Like many analysts, Balain believes that long-term growth prospects for technology still look vibrant and that major companies’ business fundamentals remain solid.
Yet with most tech stocks still selling for historically high price-to-earnings ratios, Microsoft facing an uncertain future due to antitrust challenges and another Federal Reserve interest-rate increase expected next week, any news that suggests the sector’s growth is fading is viewed with alarm by many investors.
And over the last week, several announcements have raised doubts about the outlook:
* AT&T; last week warned of weaker- than-expected results in its current quarter, driving its shares from $49 before the announcement to a 52-week low of $36.25 on Wednesday.
* IBM tumbled $6 to $103 on Wednesday after CEO Louis Gerstner seemed to back away from previous growth targets. Brokerage PaineWebber cut its 2001 earnings growth estimate to 11% from 14%.
* Motorola plunged $17.75 to $86.75 on Wednesday after brokerage Salomon Smith Barney cut its price target for the stock, saying parts shortages and a contract loss to a rival threaten to slow the company’s growth.
* Cisco Systems, the network-equipment leader, late Tuesday announced first-quarter earnings that beat Wall Street’s average estimate. But the stock still fell $4.25 to $58.50 on Wednesday after the the company said it faces shortages of key parts.
What’s more, an article in financial magazine Barron’s last weekend questioned whether Cisco can continue its breakneck rate of growth in coming years.
Yet many analysts point to the robust first-quarter earnings growth reported by many tech companies as evidence that demand for tech products and services remains strong.
Late Wednesday, semiconductor manufacturing equipment giant Applied Materials said that its quarterly earnings more than tripled, and that new orders were up 19% from the previous quarter.
In other periods of broad decline for tech shares, weak customer demand or excess inventory could be pegged as the culprit, said Kurt King, an analyst with Bank of America Montgomery Securities in San Francisco. But neither of those conditions exists today, he noted.
“The outlook for technology has barely changed from where it was two months ago when the Nasdaq was at a record level,” King said. “What’s changed is investors’ willingness to chase stocks higher and higher. The concerns center on valuations and the interest-rate outlook.”
In other words, although growth expectations for many tech firms remain stellar, investors continue to struggle with the issue of how high the stock prices of the companies should be, given the threat of higher interest rates and other challenges.
Even with their latest declines, stocks such as Cisco and Intel are historically high relative to underlying earnings. Cisco’s price-to-earnings ratio is 115 based on the 51 cents a share it’s expected to earn in the fiscal year ending in July. Intel’s P/E is 35 based on 2000 estimated earnings.
Yet the median earnings-growth rate for technology companies has been 13% a year over the last five decades, according to Ashok Kumar, an analyst with U.S. Bancorp Piper Jaffray in Minneapolis.
And even though Cisco’s expected near-term growth rate is well above that, at about 30% a year, “What’s embedded in [Cisco’s] stock price is earnings growth of 60%, which is beyond the realm of possibility,” Kumar said.
Does that mean shares of Cisco, and other tech giants, are bound to decline further?
Bearish analysts believe the stocks remain far overpriced. But others point out that investors typically place the highest valuations on the companies that can consistently show the fastest earnings growth. And that still describes the tech sector, bullish investors say.
Unlike many “dot-com” firms that have seen their stock valuations drop by 75% or more in the last two months, blue-chip tech firms don’t merely sell goods or services to Internet customers--they build the Internet infrastructure.
“If you believe the Internet is here to stay,” then expect strong and sustained growth from Cisco, Intel and other firms that will build the network, Chase’s Balain said.
Likewise, in the microprocessor sector, burgeoning demand for cellular phones, wireless networking equipment and hand-held computers has many suppliers scrambling to keep up.
“Most of these companies continue to be capacity-constrained, which is a good thing in this market,” Balain said.
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Failed Tech Rebounds: A Sampling
Wednesday’s Wall Street slump sent many technology shares below their closing low prices reached in the mid-April market dive. Many other tech issues are very close to falling below their April low prices. That may be a bitter pill for investors who bought into the late-April and early-May rebound in the tech sector, figuring the worst was over.
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52-week April Rebound Wed. Stock high low high close Agilent Tech. $162.00 $79.50 $100.76 $77.00 Apple Computer 150.38 109.25 128.31 99.31 Broadcom 253.00 122.25 182.00 145.00 Cisco Systems 82.00 57.00 71.44 58.50 CMGI 163.50 52.06 71.25 53.38 DoubleClick 135.25 51.63 75.88 49.00 Healtheon/WebMD 126.19 17.06 21.06 16.63 Infospace 138.50 45.44 71.81 45.81 Intel 145.38 110.50 127.13 106.06 JDS Uniphase 153.38 79.63 104.25 80.19 Juniper Networks 312.94 158.06 218.94 156.38 Motorola 184.63 105.00 121.63 86.75 Qualcomm 200.00 97.25 113.69 97.31 Sun Microsystems 106.75 76.50 93.00 77.81 Vitesse Semicon. 115.69 50.63 69.44 45.75 Nasdaq composite 5,048 3,321 3,958 3,384
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Source: Times research, Bloomberg News
