Tech Firms See Rate Cut as Possible Catalyst for Growth, Investment
Given the troubled technology sector’s drag on the economy, the Federal Reserve Board’s rate cut Wednesday seemed to be targeted squarely at Silicon Valley.
The Fed justified its action by citing a drop in capital investment and dwindling corporate profits, two problems that have pummeled the tech-heavy Nasdaq in recent months and sum up the state of the technology industry today.
Technology manufacturers greeted the cut as a tonic for stronger growth, saying it could stimulate capital investment and confidence that could lead to renewed spending for Internet equipment--and down the road, to consumer devices as well.
The dramatic plunge of JDS Uniphase shares was “driven in large measure by precipitous declines in capital spending by telecommunications companies,” said Anthony R. Muller, executive vice president of the San Jose-based maker of equipment that operates fiber-optic telecommunications and computer networks. “[But] the Internet is going to grow very rapidly for many years to come.”
Demand for network products will inevitably surge to fuel that growth, Muller added.
Michael Murphy, editor of the California Technology Stock Letter, said that one of the industry’s most formidable problems has been the inability of telecommunications companies to obtain financing.
“Those are the guys that have the big capital spending projects, and they had to postpone or cancel them,” Murphy said. “What I expect is that the high-yield bond market will open fairly quickly now because there are so many investors that needed to put money to work at higher yields. . . . They need to borrow a humongous amount of money to build out the new wireless networks.”
Many in the technology sector have been calling for a rate cut for some time. Last month, Internet equipment giant Cisco Systems Chief Executive John Chambers sought substantial cuts in the face of plummeting orders for his company’s network equipment.
The Fed’s half-point cut in March failed to dent Cisco’s near-term malaise, and the San Jose company announced it would cut 8,000 jobs. On Monday, the firm upped that figure to 8,500.
Some market watchers believe the Fed viewed Cisco’s problems as a sign that extraordinary measures were called for--and responded with Wednesday’s action.
Cisco, like many large PC and equipment makers, declined to comment on how lower interest rates may affect their businesses.
Some technology analysts remained skeptical that the rate cut will cure what ails much of the tech sector. Consumer spending on tech products is off sharply, and many corporations say they may have overspent in 1999 and 2000. If the main problem is excess inventory and slack demand, lower rates may not be a cure.
“People have all the PC products they need, and they already have cell phones,” said Fred Hickey, editor of the High-Tech Strategist, a newsletter in Nashua, N.H. “Where exactly are we going to get the demand for those products?”
But for the most part, executives at Silicon Valley tech companies were hopeful that Wednesday’s surprise rate cut would help reignite sales of their products and services.
Micron Technology, a large supplier of computer memory chips for PCs, server computers and devices that operate computer and telecom networks, expects some increased demand from the Fed’s move.
“[Micron’s] inventory problem peaked in January. Since then, inventories have been coming down steadily,” said company spokesman Sean Mahoney. The current growth in demand “may not be the enormous growth that was predicted, but it is still comfortable growth,” he said.
And others say they already are seeing light at the end of the tunnel.
Apple Computer announced Wednesday that it had largely solved its serious oversupply problem. The troubled computer maker’s stock jumped $2.39 to close at $22.39 in regular Nasdaq trading Wednesday--then leaped to $27 in after-hours trading after its announcement and its earnings report of a modest profit of $43 million.
Software maker Interwoven, whose products help manage the flow of content on the Web, also is shifting its projections and predicts that software spending will bottom out in the second quarter.
On Tuesday, computer chip giant Intel offered an optimistic outlook in its earnings report, validating some analyst reports that the chip industry has finally bottomed out. Intel’s stock gained more than 20% on Wednesday, closing at $31.28 in Nasdaq trading. And IBM, which saw its profit grow in the last quarter and reaffirmed earlier revenue predictions, saw its shares rise $6.80 to $106.50 in regular New York Stock Exchange trading. The shares jumped to $110 in after-hours trading.
*
Reuters was used in compiling this report.
*
More Inside
Fund Reaction: Equity fund managers cheered the Fed’s surprise rate cut, C4
Consumer Loans: The rate cut will reduce borrowing costs but may drive up debt, C5
