Trouble Ahead, Trouble Behind
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By Eric J. Savitz
TheStandard.com
Thursday June 21, 12:15 am Eastern Time
<<When it comes to technology stocks, investors have been asking the wrong question.
What the world wants to know, of course, is when the tech recession will end. Technology investors continue to cling to the notion that, after a downturn, stocks turn up about six months before fundamentals improve. That implies that it doesn't matter how bad things are now, as long as they get better before too long.
Recent earnings warnings have Wall Street a bit nervous about when the upturn might arrive. But even grizzled bears like yours truly grant that improved business conditions will arrive someday. So here's a better question: What will the recovery look like when it gets here?
It is the suspicion here that many investors are laboring under the false impression that the rebound will look a lot like 1999 and 2000, with huge growth in tech spending across the board. But that ain't in the cards. Far more likely is a recovery that not only shows up behind schedule, but is also more sluggish than expected once it starts.
That raises questions about the prospects for already pricey tech stocks. The 36 largest tech stocks trade at an average 51 times estimated 2001 earnings, according to the High-Tech Strategist newsletter. The high multiples - in the 1990 bear market those stocks traded at an average 15 times earnings - implies investors have a lot of misplaced optimism about the shape of the recovery to come.
Spending on information and communications technology, which averaged about 13 percent growth through the '90s, jumped 21 percent in 1999 and 25 percent in 2000, notes Rick Sherlund, software analyst at Goldman Sachs. This year, thanks to the dot-com implosion, the crisis in telecom and shrinking corporate IT budgets, tech spending will tumble 18 percent, he says. And here's the distressing news: For next year, Sherlund expects growth of only 5 percent, with a return to historical levels north of 10 percent unlikely before late 2002. Hardly the setting for a big bounce in profits.
As companies continue to pre-announce weak second-quarter results, dreams of a robust recovery in the third or fourth quarter of this year are dying fast. Sherlund says most of the software industry execs he talked to last week now expect a rebound in demand not this year, as many had previously hoped, but next year - with a few expecting the turn to be delayed until 2003.
Of course, the problems are not just in software.
It could be five years or more before spending on telecommunications gear returns to peak levels, says Cliff Higgerson, a partner at VC firm ComVentures, who figures that the spending could keep shrinking until late 2003. Higgerson notes that all the drivers that lead to a huge jump in telecom spending - easy access to public and private market capital, generous equipment financing from companies like Lucent and Nortel to newly minted startups, and heavy spending by the Baby Bells and other incumbent carriers to keep up with the newbies - are gone.
Sure, demand will eventually recover. But the hard truth is that the technology and communications sectors continue to suffer from a severe case of indigestion that only time can cure. "The snake has swallowed the pig," Sherlund says. "And the snake is a lot longer than everybody thought.">> |
