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Technology Stocks : WDC/Sandisk Corporation

WDC 172.26

-2.2%

Dec 31 3:59 PM EST

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To: Ausdauer who wrote (12424)	7/1/2000 5:00:28 PM
From: Rob S.	Read Replies (1) of 60323

Underlying the growth in valuation of semi tech stocks is both the growth in underlying demand for products that use the specific semis and the demand for stocks in the market. Tech stocks tend to go from one extreme of valuation to the other. A few years ago the growth in underlying electronic products demand was down to something like 12% compounded growth. While still healthy in comparison to the overall economy, the degree of growth relative to supply had diminished sufficiently to change the basic equation: many suppliers reported shipping 10%-20% more unit volume while they saw the ASP (average selling price) shrink by 30%-50%. Of course, that quickly moves to the bottom line and is reflected in higher costs/sales, more write-downs and lower earnings (or in some cases mounting losses). When the cycle shifts in favor of the buyer, so does the willingness of investors to support higher earnings multiples. While in good times investors are willing to reward companies with valuations for imagined sales and earnings two or more years out, during semi market contractions investors shift to ignoring the prospects more than a few quarters out. OK, anyone who invests in tech stocks should understand that they are highly volatile and they tend to move in cycles roughly corresponding to the supply/demand cycle for underlying products. History doesn't always repeat itself but those of us who have been around the game for a few years have yet to see that it does not in this case. The market for tech stocks has reached a level where a reasonable investor might question "paying up" for valuations that exceed historical norms by such a wide margin as is currently apparent. On the other hand, communications technology is in a state that one can honestly equate to "revolution" that is rightly emphasizing the worth of companies that are prime movers and enablers. Then how do you judge when the sky high valuations might succumb to a long term slump such that long term investors should clear out to wait for the next cycle to repeat itself? A few years ago the book to bill ratio was widely watched as an indicator of the health of the electronics market. Because of problems with accounting for over bookings and other fluctuations and the evolution of more comprehensive models, that measure has been less emphasized. Other measures include actual shipments and forecasts and surveys of inventories and buyers purchasing plans. Most of the comprehensive models are only available by forecasting companies for a cost. While it has it's limitations for short term measurements, the BTB is still very useful to determine 3-12+ month trends in market movement. I suggest that you look at the graph for BTB and compare that to the graph for the electronic tech indexes. What I have found is that the general trend in the market remains in tact 3-6 months after the BTB deteriorates and drops down toward 1 or less. The current trend in semi growth is expected to continue for at least another 18 months. If the BTB drops for 3 months or more, I suggest taking profits. While the level of valuations for many tech stocks is again questionable, the market should generally support high valuations until the growth of the industry subsides.

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