Reasons for continued growth --
Sun does not seem to me to have the necessary numbers for continued growth in stockholder value. It's 20% growth of revenue and EPS is too small to sustain stock price growth at recent rates. The attack of Compaq, IBM, HP and Dell on the server space will ievitably reduce Sun's margins and rate of revenue growth. Defensive measures such as price cuts will just make things worse.
It is barely conceivable that Cisco might sustain its growth of market price for a few (2-3) years, but it is simply too large to maintain its overall rate of growth in prices because of the competitors who can erode its margins. Cisco has never shown any particular technical inventiveness, spends little on R&D and is being forced to pay through the nose for other technology.
Dell is just an assembler of standard parts with an undifferentiated product line, no research, low margins, and little chance for improvements in efficiency.
JDSU may have slightly longer to grow, but it is not even profitable now. With rapidly growing EPS it cannot sustain its rapid growth.
QCOM already seems to be experiencing some decline in growth. It is a one trick pony.
Intel is a huge company trapped in a slow revenue growth industry (compared to networkers) and already makes a large proportion of all profits made by semicons during the average year. Its attempts to expand into the manufacture of low margin electronic parts and web hosting may very well turn out to be a failure. Its profit growth in 1999 was 8 % and its market price increase purely from the doubling in its P/E. I doubt that much in the way of further increases in P/E can be sustained for more than a few months longer even if the PC market continues its recent rapid growth. The big confrontation between the big servers will heat up in 2001 and thereafter.
Need I add that the bubble in Biotech stocks is based on hype and ill-supported preconceptions. With few exceptions, the individual companies (especially genomics) lack credible business models, and many of those companies with treatments in use are being squeezed by their pharmaceutical partners. Few of those getting ready to manufacture their treatments for use have the knowledge and experience actually to market their products even if they pan out.
As the number of firms in an industry is reduced by merger and acquisition, the apparent inconsistency of expecting several firms with high PEGs combining into one firm with a PEG = 1 becomes glaringly obvious. The survivor in a merger by pooling of interests often takes a large hit in stock price, and this is the last year in which pooling of interests will be generally acceptable. Future mergers will involve tax penalties on stockholders whose shares are acquired. Moreover, the Department of Justice and FTC are likely successfully to challenge mergers that are in direct restraint of trade or monopolistic (which are the only ones worth doing).
It is, IMO, distinctly possible that by 2001, 97-99 will be viewed as a golden age in which the advantages of investing in tech stocks made it possible to multiply one's wealth
5X or even 10X without extraordinary risk. The true master will be able to manage his accounts so that he leaves an industry in time to avoid big drops in stock value. He or she will be able to judge when a sharp correction is V shaped (Aug and October 98)or the beginning of a bear market. He will be able to judge whether a 25 basis point jump in interest is another nuisance or the straw that breaks the camel's back. He will be armed with a hair trigger, ready to blow away his positions and reposition at the drop of a feather. He will be brusk and totally unsentimental.
I read too much about "having faith" in a guru or CEO.
This is a world run according to the rules of chaos and blind chance. One may hope for a second chance, but he has only one life. It is a safe enough world for one satisfied with 6 per cent. The English Victorians had to be satisfied with 3. But if one wishes the big score, he must run terrible risks. Only a few will win. And even they will have to chose a good time to retire from the game. |
