Expecting Tech's Comeback? Keep waiting. With another terrible year looming for chipmakers, it's still not safe to buy in.
FORTUNE
Tuesday, January 21, 2003
By Herb Greenberg
Not long ago I asked the manager of a well-known mutual fund how he got stuck with so many poorly performing semiconductor stocks. He conceded almost sheepishly that he had made a classic mistake: "I didn't look at how the end markets were doing." Guess what: Demand doesn't appear to be any better today than it was as far back as September 2001, when I first mentioned here (see Betting on a Tech Recovery?) that chip stocks weren't likely to see a return to their former glory anytime soon. At the time investors were desperate for any sign of a bottom, but it turns out that stocks like Applied Micro Circuits, Broadcom, and Vitesse Semiconductor were considerably more expensive than they are now!
The bad news is that technology stocks are still expensive compared with the overall market. In fact, the price-to-sales ratio for the top 16 tech stocks, with a market value of $782 billion, is 7.7, up from 2.3 in 1990, according to the newsletter High-Tech Strategist; by contrast, the S&P 500 is trading at two times last year's sales.
Meanwhile, investors continue to think and act as if Silicon Valley will soon regain its former glory as an investment. To which I say, Don't count on it. "The world has not come to grips with the fact that next year is going to be another terrible year for the semi industry," says Gartner Dataquest chief analyst Jeremey Donovan. Gartner's crystal ball has turned so stormy that in February, Donovan says, his firm plans to "significantly" lower its 2003 semiconductor forecast, which now calls for a 12% gain.
Chips are the bellwether because they're the engine for anything with half a high-tech brain, whether it's in a computer or a toaster. Their health (or lack thereof) is reflected in the Philadelphia Stock Exchange semiconductor index, which has lost three-fourths of its value since peaking in March 2000--a drop so big that a knee-jerk contrarian response might be to think there couldn't be a better time to invest than now.
The trouble for anybody looking for a fundamental reason to buy, however, is that corporate America--the biggest customer for technology--has put the brakes on increased new technology spending this year. In fact, not long ago Deutsche Bank said that while spending on storage products as a percentage of its infrastructure budget continues to grow, its actual spending for storage (in absolute dollars) is likely to be flat to slightly down in 2003. "We are not seeing any planned growth in our information-technology budget for next year," confides a technical architect for one Fortune 500 company. "Most of the money allocated for next year will just be on services for maintenance of existing technologies, as well as pilots for newer technologies such as web services. But this requires no new hardware, just consulting services." And at bargain prices to boot.
Much of what is selling is going for a fraction of the original price. And much of that merely involves upgrades. As an example, consider one tried-and-true benchmark of trends in tech spending--me. I just replaced two bulky 17-inch Hewlett-Packard PC monitors with pencil-thin 15-inch high-quality Videosonic screens at $300 apiece. A year ago the same screens would have cost double that. A few months earlier I replaced my videogame-obsessed son's four-year-old Dell desktop with one that has twice the power for half the price. In turn, I replaced my five-year-old clunker with his old unit, on which I doubled the memory and increased storage by 19 times for less than $200. And therein lies the problem for tech companies: "They're not making any money," says Seattle money manager and longtime tech bear Bill Fleckenstein, who also writes for my regular employer, TheStreet.com.
There are glimmers of hope, such as EMC's recent report of a better than expected outlook--albeit against previously lowered guidance. But it's more likely that other tech outfits will follow the lead of companies like Cypress Semiconductor, Silicon Storage, and Cirrus Logic, preannouncing weaker than expected results thanks largely to languishing sales of cellphones and PCs. Cellphone companies are having such a hard time signing up customers that they're discounting those snazzy new phones with color screens. In the absence of another boom like the Internet--when everybody got wired at once--or a surprisingly sharp improvement in the economy, that's not likely to change.
So when will it really be safe to dive back in? "When people who now believe in tech stocks don't believe," Fleckenstein says. "Right now most of these stocks aren't priced to compensate you for the risk."
Herb Greenberg is a senior columnist for TheStreet.com. Questions? Comments? Contact him at herb.greenberg@thestreet.com. |
