Tech rally seen short-lived
JON OGDEN
Enjoy the rally in technology stocks while you can, warn analysts, as it is certain not to last long.
Most leading technology firms have already warned at least once in the past two months that their first-quarter earnings would not meet expectations.
With the first-quarter reporting season under way, there was a reasonable chance not too many more nasty surprises would emerge, said Russ Mould, a technology analyst at UBS Warburg.
With companies not prepared to stick their necks out, and, given guidance for revenues in coming quarters due to "low visibility", the stage was set for a rally in the bombed-out sector, he said.
"It is a trading opportunity maybe but to come out on time you are going to have to be fairly nimble," Mr Mould said.
"There could be further warnings for the second quarter. That is when the rally could run out of steam."
The big problem for the sector is that analysts' forecasts and stock prices still reflect too optimistic a scenario for how the coming months will unfold in terms of revenues and earnings.
For example, UBS Warburg forecast its universe of European technology stocks would see earnings fall 8 per cent this year but soar 28 per cent next year.
"That is going to be the story. At some stage we have to take a long, hard look at 2002 numbers. That is when you get capitulation," Mr Mould said.
Hopes for an upturn in the sector are largely riding on interest-rate cuts spurring a rebound in the rapidly slowing global economy, rekindling demand for tech products.
Analysts might not throw in the towel until the third quarter and finally cut their forecasts for next year, Mr Mould said.
There was now a debate about whether problems in the technology sector were cyclical or structural. If the problems proved to be structural in terms of overinvestment leading to a prolonged weakening of demand, that was not yet factored into share prices, he said.
The telecommunications sector had doubled its invested capital over the past two years as it furiously built new networks, sparking huge demand among suppliers such as Cisco Systems. Whether that pace could be sustained against more normal growth of 5 to 10 per cent a year was debatable, he said.
There is certainly no real recovery in sight for the key semiconductor sector even though stock prices have taken a hammering for the past eight months.
"I think, at this point, we have still got more pain ahead of us. We are still very early in the semiconductor downcycle," said Dan Heyler, head of Asian semiconductor research at Merrill Lynch.
"We are moving towards a very difficult second quarter."
Merrill was predicting that semiconductor revenues would fall this year by 2 to 5 per cent. But even that might prove wildly optimistic with chip inventories at a 4.5-year high, Mr Heyler said.
The problems were underlined in the first-quarter results of United States handset and chip-maker Motorola released on Tuesday. The company said orders for its chips had plunged 31 per cent quarter on quarter and 47 per cent year on year, a number which one analyst described as "unbelievable".
Some analysts are comparing the downturn in the semiconductor industry to previous slumps in 1996 and 1998. However, Daniel Niles of Lehman Brothers believed this year would be the worst ever for global revenues garnered by chip companies.
He predicted a drop of 18 to 20 per cent, which would be worse than the previous record revenue downturn of 17 per cent in 1985.
"We continue to recommend that investors remain underweight in semiconductor stocks through the summer and use any rally to lighten positions. It might take until mid-2002 before we see positive revenue comparisons year on year for the semiconductor industry," Mr Niles said.
In the mid-1980s downturn, industry leader Intel Corp "saw five out of six down sequential quarters", he said.
Even if chip companies were able to get customers to commit to orders, they would have to accept lower prices, giving another knock to revenues, said Jonathan Joseph, an analyst with Salomon Smith Barney.
"In recent weeks, we have begun to hear of greater price concessions in a number of markets, particularly in flash [memory]," Mr Joseph said.
Demand was so slack that Intel microprocessors traded at a 16 per cent discount in the grey market to their list prices, he said.
The demise of the dotcom sector has not only removed a lot of demand for technology products but is now also adding to supply.
"The extent of this slowdown is probably most evident by the auctions in California of Cisco, EMC and Sun [Microsystems] equipment at 10 to 20 cents on the dollar," Mr Niles said.
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