WHAT IS REALLY HAPPENING HERE
For some reason, some technology analysts are congenitally
overoptimistic. It's as if bad news is unimaginable to them. To be
successful investors, we HAVE to live in the real world. Not the
world we wish for, but the world that is a function of current
economic realities. The reality that many analysts cannot come to
terms with is that ECONOMIC cycles overwhelm product cycles in
today's world.
It didn't use to be this way when infotech was only 5%-10% of
the capital expenditure budgets of businesses. At 50% moving to
70% of capital expenditure budgets, the concept that product
cycles drive tech stocks in the 21st century is now a dinosaur,
in most cases.
Take the Microsoft Windows XP operating system upgrade, for example.
Our Alliance intelligence on this was that it was a big yawn BEFORE
Sept. 11. That's nowhere near what you hear from many analysts. Now,
we are surveying demand again and I'm afraid it will only be worse.
This is the difference between our demand-side analysis and talking
to management to get your research. What on earth would you expect
the management of tbe leading semiconductor companies to tell you
about demand, how BAD it is? Do you remember the Alliance member I
told you about who works for one of these firms? He told us that his
job, at that time, had only been saved because of the huge effort
required to CANCEL several million-dollar orders.
This is part of the reason why we downgraded semiconductor equipment
at prices 50%-60% higher than today. This is the intelligence you
get from the front line, not the executive suite. The same was true
for software when we got the word that salespeople could not close
deals without 50% discounts to buyers.
One of the only things I am absolutely positive of in this world is
that infotech stock prices will continue to get discounted to
historic low multiples compared to 1995-'96. (Approximately 2.3X
sales for hardware and semiconductors/equipment and 2.6X sales for
software with a few exceptions like Microsoft and new rapidly
adopting technologies like flat-panel displays and firms like
Genesis Microchip and Photon Dynamics.)
Yes, this means most software, semiconductor manufacturers and
semiconductor equipment companies are headed lower--in some cases,
much lower. Why am I so sure?
Because there is no possible way to value these companies OTHER than
bring them back to the last valuation that did NOT presume 40%-50%
annual earnings growth.
In essence, my argument is, "Why on Earth (with a few exceptions, of
course) would I value an infotech company HIGHER than I did in
1995-'96?" That's what some tech analysts are asking you to do and
it's at a time when any person with half a brain knows:
1) We are now in a recession that undoubtedly started in the second
quarter of 2001 and should last AT minimum an amount of time similar
to the spending bubble that preceded it.
2) PC demand will undoubtedly contract for 2001 and 2002 (as opposed
to 1995-2000 double-digit growth in advance of Y2k).
3) We have declared war against an international network of
terrorists with an unknown outcome and unknown battle lines.
4) We still have a massive misallocation of capital to work off from
the infotech-spending bubble.
5) Corporate profits have evaporated and are still contracting
(which means capital budgets have, too) with REAL S&P 500 earnings
for 2001 closer to 1996's $41 level than analyst's $51 target.
6) Corporate layoffs lagged for the last 12 months as firms feared
being understaffed for the "V"-shaped bottom in July 2001. They will
now explode with more than 2 million layoffs forecast for the next
90-120 days.
7) Global interdependence, not present in the last recession, means
the likelihood of a global recession is virtually 100%.
8) A huge number of tech mutual funds are going out of business with
$3 billion in redemptions A DAY.
Come on. I am the biggest and most-optimistic bull you can find
about the INTERMEDIATE-TERM outlook for our victory over terrorism
and the success of the new Marshall Plan of spending about to hit
our economy. WE WILL build a foundation of recovery that the market
will anticipate and see a bull market ahead of the next business
cycle upturn that will make us forget about the Fall 2001 stock
market.
But the market is not nearly done returning valuations to reflect
the reality of 1995-'96 because NO ONE knows what the next six to 12
months will be like. NO ONE. In the absence of a predictable future,
the market is rightly going back to the last reality it can measure.
Since we cannot forecast earnings, the market HAS to go to using
multiples of sales. This only makes sense. And taking tech companies
back to 1995-'96 sales multiples is the only logical thing to do.
This is called "market risk"--the risk that investors will not want
to pay for the same multiple of sales that you have. A company can
be the absolute leader of its business, be the greatest R&D machine
the world has ever known and have the sales force of the decade
andstill have its valuation cut in HALF from here. That's because
the market is not willing to extend ANY benefit of the doubt OTHER
than historic valuation measurements. |
