Experts Talk Up Tech Stocks Prematurely
10/5/00 8:19:17 AM
Source: USA Today
NEW YORK -- Credible experts using straightforward logic are making a case that the bloodletting in tech stocks is coming to an end.
Maybe they're right, but don't count on it.
Many of the ailments hurting the shares are serious. They won't be cured as quickly as a crashing dot-com stock purges day traders from the market. The problems are likely to linger until the prices being paid for the stocks of great tech companies are convincingly in line with the companies' future sales and profit growth. It may be months before Wall Street shows it has a reasonable fix on how many more PCs, computer servers, data storage cabinets, software packages, semiconductors, wireless phones and telecommunications lasers tech companies will sell next year.
But haven't the tech giants already come down to reasonably safe levels? After all, since Aug. 31, Intel is down 44%, Oracle 25%, Dell 35%, Cisco 15%, JDS Uniphase 24% and the Nasdaq 16%. Since its March peak, Nasdaq is down 30% to 3523. The declines have helped and are one reason Goldman Sachs strategist Abby Joseph Cohen calls the backdrop for tech investments ''favorable.'' Jeff Applegate of Lehman Bros. figures that the price of tech stocks relative to their expected earnings growth rates has fallen back in line with the rest of the market.
And, yes, there are other reasons to think the stocks won't fall further. Successful mutual fund manager David Alger cites the stabilizing of the euro, the easing of oil prices and, most important, the apparent end of interest rate increases. Plus, headlines will clear any day of earnings warnings for the September quarter.
''We're looking for a strong bounce'' in tech stocks, Alger says. He predicts Nasdaq will end the year above 4,000 with a modest gain for 2000.
But reasons more trouble may lie ahead are as nearby as Dell's announcement late Wednesday that its latest revenue, while up 7% from the previous quarter, is 3% short of expectations (story 1B). Disappointing growth in personal computer sales was high on a recent list of tech stock worries put together by analysts at UBS Warburg.
What's telling is that the problem hasn't been falling PC sales. Sales are growing, just not enough to catch up with the surge in PC makers' stocks last fall and winter. Hopes that Microsoft's introduction of Windows 2000 would save the day haven't been realized.
Another worry: Demand for computer servers won't grow as fast as before, now that the dot-coms are in trouble. Without the threat of their competition, established firms may be slower to build up online.
And on top of that, sales of wireless phones are up but still short of grand expectations by phone makers, their suppliers and investors.
But Wall Street's most revealing tech conundrum may be the debate over next year's spending on telecommunications equipment by carriers from giants like AT&T and WorldCom, to Internet backbone companies Level 3 and Williams, to local access outfits such as ICG and wireless networks such as Sprint. Sales to carriers have been key to Cisco's 60% annual revenue growth and the strength of its stock. They've also driven optical equipment stocks, which at least until September, were successors to dot-com fever.
Analyst Paul Sagawa at Sanford C. Bernstein expects global spending on telecom equipment will grow 19% in 2001, down from 28% growth this year. Saying that's not enough to keep up the revenue and earnings growth expectations built into the prices for Cisco and Nortel, he downgraded their stocks last week.
The carriers plan to actually cut their spending from last year's levels. Sagawa, giving the equipment makers the benefit of the doubt, is guessing the carriers will go over budget as they have past years. But the carriers will have trouble spending 19% more because they've already borrowed and spent heavily and don't have free cash flow.
Sagawa says the slowdown in growth won't show up as slowing the equipment companies' revenue growth before January. But as the consequence comes into sight, investors may conduct an ugly reassessment of how much faster tech can grow than the world economy. |
