Tech Meltdown: Golden Chance?
By Todd Dagres Communications Week
Have networking companies finally run out of gas?
There have been many disappointments lately with companies announcing lower than expected earnings or barely meeting the Wall Street's earnings estimates. Balance sheets indicate companies are having a skin-of-your-teeth quarter, i.e., just barely meeting revenue estimates. Fourth-quarter results on the whole signaled a decline in the growth rates of the networking business. Stalwarts such as 3Com, Cascade, Shiva and Premisys have announced disappointing results. I wouldn't be surprised to see more bad news in first-quarter numbers. One reason could be that corporate customers are not increasing their budgets for networking gear as much as they have in recent years. The Japanese market, often the second or third largest for networking companies, seems to be slowing. Yet another factor could be the exchange rate, which makes U.S. products more expensive overseas.
On the average, the stock prices of the leaders of the networking market are down 50 percent since December. The leaders include Cisco, 3Com, U.S. Robotics, Bay Networks, Cabletron, Ascend, Fore Systems, Shiva and Premisys. These "can't-lose" stocks have caused considerable indigestion among the money managers who rode the backs of the networking stocks for years.
Is this a real meltdown caused by a fundamental change in the networking business or is it an overreaction based on too few data points? Probably a little of both. How long could the market grow at greater than 30 percent? Since Cisco, Bay Networks, 3Com/U.S. Robotics, Cabletron, Ascend, Fore and Cascade represent more than 85 percent of the group's revenue, they ARE the group. Unless they want to grow at the rate of the market, say 30 percent, they must take share from the other guys. Or they must buy the other guys. More consolidation in the networking market is likely.
The networking market seems to be maturing. However, I believe the market will continue to offer earnings growth that will attract money managers once they feel the knife has stopped falling. Corporate America continues to increase its capital expenditure on networking gear, the Internet/intranet wave continues, the spread of networking technology overseas is not stopping, and U.S. companies still dominate the market. I would not be surprised to see the networking group rally by the fall once investors feel safe and realize the earnings growth is still there among the leaders and innovative niche players.
Todd Dagres is a partner at Battery Ventures, a venture capital partnership based in Boston and San Francisco. The opinions expressed are his own. He can be reached at tdagres@ battery.com or 617-237-1001 or 415-372-3939.
Copyright r 1997 CMP Media Inc.
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