Doc/Mike/Thean/wedgie/EVERYONE in tech:
Doc, NTAP and RIMM mentioned at bottom. Good pick on the former.
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Silicon Valley
Jun 11, 1999
Bull Sessions With the Merrill Crowd Offer Insight on Tech Stocks
By Adam Lashinsky
Silicon Valley Columnist
Good investors are constantly looking for ideas. Publicity-hungry investment banking analysts, who sell those ideas, are constantly looking for an audience to air their thoughts. Merrill Lynch's team of tech analysts are so keen to peddle their points, in fact, that they hosted two mealtime bull sessions Thursday for Silicon Valley financial writers.
Over lunch at San Francisco's plush Farallon and dinner at Palo Alto's chic Spago, the Merrill sell-siders aired their views on tech stocks. Perhaps it was the wine, but the group was surprisingly forthright in talking about their various sectors. Taken with the grain of salt necessary to digest all offerings from such analysts -- whose truly fat fees come from making life easier for their investment banker brethren -- some of the insights from the Merrill crew should help guide a handful of investors.
In a group that included the oft-quoted hardware analyst (and manager of technology research) Steven Milunovich and Internet superstar Henry Blodget, the surprisingly bright light was Mark FitzGerald, Merrill's low-key semiconductor-equipment analyst. FitzGerald was strikingly gloomy on his group, made up of the companies that are to chip producers what machine-tool makers are to industrial manufacturers. The sector is in a robust recovery at the moment after suffering through a slowdown. But FitzGerald had a wake-up call for one-size-fits-all investors.
"This idea that everybody is going to recover is dead wrong," said FitzGerald. "There are a whole host of companies that will not be able to reproduce their profitability of the last up cycle," which lasted roughly from 1990 to 1998. "We've seen a run-up in orders, but we've yet to see who will be profitable."
Winners, said FitzGerald, will be the equipment companies with unique products, like Applied Materials (Nasdaq:AMAT - news) , Novellus Systems (Nasdaq:NVLS - news) and KLA-Tencor (Nasdaq:KLAC - news) , each of which is up nearly threefold from its 52-week low. But the companies FitzGerald pegged as also-rans -- Lam Research (Nasdaq:LRCX - news) , Mattson Technology (Nasdaq:MTSN - news) and FSI International (Nasdaq:FSII - news) -- are up off their lows in similar fashion. Because each faces tough competitive issues, FitzGerald said he doesn't see the latter group as keepers, especially because cost-conscious Intel (Nasdaq:INTC - news) won't carry into the next decade the purchasing power it had in the 1990s.
PCs aren't going away, of course. But Milunovich was all revved up about "information appliances," the gadgets that will extend the Internet beyond the personal computer. Trouble is, there are so darn few ways to play the appliance market. (Come on bankers: Do some deals!) Milunovich singled out regular fave Network Appliance (Nasdaq:NTAP - news) , the storage-device maker, and Research In Motion (Nasdaq:RIMM - news) , the Canadian maker of nifty two-way wireless pagers that let users send and receive email.
Joseph Osha, the analyst who replaced the bearish Thomas Kurlak as Merrill's chief Intel watcher, offered an unsatisfying answer to the question he says he's asked most frequently: What is the next Intel? "There isn't one," said Osha, adding that not even Intel is the next Intel.
It is precisely because of the expected rise of appliances that the semiconductor market will be fragmented, posited Osha. No longer will one company be able to supply one set of customers as Intel has the PC makers, he argued. The implications for Microsoft (Nasdaq:MSFT - news) are obvious. Incidentally, Osha said he thinks that what's behind Intel's recent tear of acquisitions is a desire to be sure there are customers for its chips, not a frantic search for new product lines. "I hope this is not a frenzied, panicked diversification," said Osha, who has largely been bullish on the stock. Hmmm. I thought Osha's mission was to repair relations with Intel.
An animated Blodget hasn't lost any verve for the Internet, despite recent relatively bearish comments on Excite@Home (Nasdaq:ATHM - news) and America Online (NYSE:AOL - news) . "I think these tulip bulbs are really valuable," he joked (yes, he was joking), before giving a serious reason why the Net is different from past speculative manias. The Net, said Blodget, is growing fast and inflicting real damage on existing players. Bottom line: Investment hoaxes don't change industries.
Christopher Shilakes, assigned the suddenly unenviable task of following enterprise software companies -- the onetime highfliers that had customers stop calling when market saturation and Y2K concerns hit simultaneously -- said he feels like the Maytag repairman. "The heady days of enterprise applications are over," said Shilakes. He offered two rays of hope, however. Revenue, which had been shrinking, should bounce back next year to grow at an annual 20% to 25% range, still a far cry from the 70% years of not so long ago. What's more, companies with broken stocks (think: PeopleSoft (Nasdaq:PSFT - news) and SAP (NYSE:SAP - news) ADR) soon will begin to enjoy "easy compares" as their year-over-year results will be pegged against the ! disasters of late 1998.
And then there's Michael Ching, the communications-equipment analyst who uses lots of acronyms best not consumed with a fine meal. Ching is guessing worldwide cell-phone subscribers will balloon from 300 million at the end of 1998 to 1 billion at year-end 2003. The beneficiaries will be the wireless infrastructure companies, his two favorites of which are Motorola (NYSE:MOT - news) and Qualcomm (Nasdaq:QCOM - news) .
That's a lot for one meal. Perhaps the Merrill mob should come again. The Bay area has many, many more good restaurants.
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