Tech Stock Rally Raising Nasdaq, Flashback Fears
Technology stocks are partying like it’s 1999, and some investors and analysts are beginning to worry about a hangover to come.
The Nasdaq composite index has led the market’s rally since Sept. 21, gaining a stunning 43.8% and far outpacing the Dow Jones industrial average’s 23% climb and the 21% rise in the Standard & Poor’s 500.
On Wednesday, Nasdaq leaped 4.3%, closing above 2,000 for the first time since early August and bringing back memories of tech stocks’ heyday in 1999.
“We’re seeing an irrational exuberance,” said Chuck Hill, research director at corporate earnings tracker Thomson Financial/First Call in Boston. “It’s like nobody learned anything, and they think [stock] valuations are going to go to the moon.”
The latest catalysts for the tech sector’s comeback include Cisco Systems Inc. CEO John Chambers saying Tuesday that November orders were solid, Oracle Corp. CEO Larry Ellison predicting renewed growth for the software giant in 2002, and personal computer sales since Thanksgiving turning out stronger than many had imagined.
In addition, top chip maker Intel Corp. and big computer maker Sun Microsystems Inc. will give mid-quarter updates today that many investors assume will be positive.
At Intel, “We think they’re going to say they’re tracking above the midpoint of their previous guidance” on earnings, said analyst Eric Rothdeutsch of brokerage Robertson Stephens. He cited the company’s smooth transition to its Pentium IV chips and higher average chip sales prices.
The stock performances of many tech firms in recent weeks have been aided by legitimate signs of a U.S. economic turnaround and by the fact that many of the companies have stopped slashing their profit projections.
“A lot of [earnings] estimates out there were driven off a very depressed third quarter,” said tech stock analyst Vadim Zlotnikov of Sanford C. Bernstein & Co. “The third quarter was the worst point, and that was used by companies to set guidance.”
As companies and consumers have pared tech spending this year, equipment makers from Intel and Sun to Dell Computer Corp. and Hewlett-Packard Co. have slashed jobs and cut expenses. Now, analysts are trying to judge how much of a sales boost will come in the holiday season and whether any revival will last into 2002.
“People expected business to be just over the cliff” after the Sept. 11 terrorist attacks, said Sunil Reddy, a fund manager at Fifth Third Bancorp, which owns Sun and Intel shares and has $30 billion under management. “The fact that it’s not is warming to some people.”
To be sure, the plunge in many tech stocks after the market reopened following the terrorist attacks was so severe that some kind of rebound was inevitable, barring a global economic collapse, analysts said. The Nasdaq index dived 16% in the week ended Sept. 21, to a three-year low, and it’s still down 17% year to date and 59% from its peak of 5,048 in March 2000.
Now, given the improving economic picture, modest expectations for a revival in tech industry profits seem “largely achievable, maybe exceedable,” Zlotnikov said.
But the gains in the stocks have astounded even some of the market’s bulls. Sun’s shares have soared 84% since Sept. 21. In the same period, Intel is up 79%.
The problem, some analysts said, is that tech stocks’ prices may have gotten way ahead of themselves relative to companies’ earnings expectations for 2002, something that makes even long-term shareholders worry.
Intel, at $34.61 as of Wednesday’s close, is valued at 60 times analysts’ consensus earnings-per-share estimate of 58 cents for 2002. That is far above the estimated 2002 price-to-earnings ratio of 20 to 25 for the S&P; 500 index.
Though it’s possible that Intel’s earnings will beat estimates, the semiconductor industry “is clearly not in a V-shaped recovery,” Lehman Bros. analyst Dan Niles wrote to clients this week.
Cisco stock, meanwhile, is priced at 98 times analysts’ average earnings estimate for the fiscal year ending in July, and 54 times the fiscal 2003 estimate. The San Jose-based maker of networking gear has posted losses in two of the last three quarters as telecommunications and Internet companies have curbed spending.
“Cisco’s price is getting to the point that implies more than they can, or are likely to, deliver” in terms of profit growth, said Jim Luke, manager of the $220-million BB&T; Large Company Growth Fund. “We are holding on to what we have, but we are nervous about the valuation.”
Many other tech stocks share the stratospheric valuation air. JDS Uniphase, though now priced at $11.43 a share, far below its 52-week high of $76, is trading at 127 times fiscal 2003 earnings estimates. Lucent Technologies has a price-to-earnings ratio of 197 based on 2003 estimates.
An economic recovery will indeed come, and technology will play a role in that, Hill of First Call said. But with too much production capacity and not enough demand to soak it up, “the idea that technology is going to lead us out of the recession to the same extent it did in the past is wishful thinking.” That is reflected in relatively paltry earnings-per-share estimates for 2002 and 2003 for many companies.
But second-guessing the tech rally since September has left a lot of money managers poorer. The momentum in the tech sector creates its own demand for the stocks, because slower-moving shares won’t help many portfolio managers recover the ground they’ve lost this year, analysts said.
“A lot of portfolio managers are trying to make up for some poor performance,” Rothdeutsch said. “It does leave me wondering what’s going to happen next year--what upside remains for the stocks, given how much they’ve already moved.”
Stocks almost always rebound ahead of an economic recovery as investors look to the future when valuing equities. The question is, how high is too high?
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Bloomberg News was used in compiling this report.
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Nasdaq 2,000, Then and Now
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