Tumbling tech stocks: problems go beyond Asia
New York Times
The wreckage was devastating. In a matter of days, an entire herd of
technology stocks was taken out to pasture and slaughtered.
The shares of little-known companies like Quantum Corp. and Applied
Materials, as well as members of the ''fab five'' of the technology
world -- Oracle, Intel, Microsoft, Cisco Systems and IBM -- were all
battered in what turned into the worst week in a decade for technology
issues.
The technology-heavy Nasdaq composite index lost 6 percent of its
value last week, and indexes that included only technology stocks were
hit even harder.
A big reason was the growing fear among investors that the economic
crisis now engulfing much of Asia would soon stunt the growth of a
whole legion of technology companies. Indeed, many of those
companies had bet on Asia as a platform for sales and earnings growth.
But the problems facing the industry go well beyond Asia. For months,
many technology companies have been feeling the pressures of stiff
pricing competition, a glut of components and a worldwide slowdown in
personal computer sales.
As a result, when the Asian troubles sharpened last week, many
investors who had long considered pulling back from technology stocks
went into full retreat. And when a host of companies fed the fears by
announcing weaker earnings forecasts and swollen inventories, the
entire sector was punished.
''If you make computer components, you had a problem whether Asia
collapsed or not,'' said Roger McNamee, a principal at Integral Capital
Partners in Menlo Park, Calif. ''Everybody is using Asia as an excuse.
But Asia was just the latest catalyst for selling.''
The dismal performance of technology stocks is significant because the
technology sector has grown into one of the largest and most closely
followed by investors. It increasingly sets the tone for the broader stock
market. If the coming week brings even more warnings of earnings
shortfalls, the tone could get even nastier.
The recent selloff was best viewed through the prism of the Pacific
Stock Exchange Technology Index, where 94 of 100 issues fell last
week, with two issues losing nearly a third of their market value. For
the index, which dropped 9.8 percent, it was the worst week since
October 1987, when technology stocks collapsed along with the broader
market.
''I don't think people realize the carnage that has taken place,'' said
James Renck, a portfolio manager at Merrill Lynch Asset
Management. "A lot of stocks are down 50 to 70 percent since
mid-October."
Particularly hard hit were shares of semiconductor makers and
companies that sell the capital equipment that helps manufacture
semiconductors -- both of which have heavy exposure in Southeast
Asia.
While Oracle, a data base software maker, dropped 27 percent last
week on record volume after the company reported disappointing
earnings, large declines were also seen in semiconductor companies
like Applied Materials, which plummeted 25 percent, and LAM
Research, which dropped 22 percent on earnings worries.
As a result, the Philadelphia Semiconductor Index fell 14.7 percent last
week. For the year, the index is up just 3.3 percent while the broader
market is up more than 20 percent.
That disparity worries technology investors, many of whom have been
riding the crest of a huge growth wave. In 1990, for instance, the
market value of the 10 leading technology companies was about $50
billion. Today, Microsoft alone is worth $165 billion and the top 10
technology companies are worth close to $650 billion.
''Technology is still going to be a great area,'' said Fred Hickey, editor
of The High-Tech Strategist, a newsletter based in Nashua, N.H. ''The
problem is, investors have to separate the business from the market
valuations. People wonder why stocks go down 20 points in a day; it's
because the stock market was out of control. It was so ga-ga over the
industry. Now those stocks are going to correct.''
Behind the big selloff, though, are indications that the technology
industry is undergoing a subtle but momentous shift in the way it does
business, one however that many industry experts say will benefit
consumers by resulting in cheaper, more powerful computers.
One change is that disk drive and semiconductor manufacturers are
now under great pressure to find more efficient ways to produce, partly
because of the success of the ''just in time'' inventory model used by
Dell Computer.
''All that's going on is the industry is deciding it's going to be more
efficient,'' McNamee said. ''The whole supply chain is being optimized.
It's being forced to conform to the model of Dell.''
Whether component companies can accomplish this, however, is still
unclear. ''Semiconductor plants cost $1 billion to build and two years to
put in place,'' Hickey at The High-Tech Strategist said. ''That's a
difficult process. Dell just assembles and tests computers.''
Some analysts, however, say that the twin troubles of turmoil in Asia
and an oversupply of components in the rest of the world, will force the
industry to push even harder to optimize its manufacturing channels,
creating even cheaper computers that could, in turn, open up an even
larger consumer base.
''When you can buy a good multimedia PC for $1,000, that opens up a
whole new group of buyers,'' said Michael Murphy, editor of the
California Technology Stock Letter.
In fact, many analysts expect the industry to shake off its recent
troubles, and the stocks are likely to begin another sharp growth phase.
That is largely because most analysts believe that technology
components will continue to grow exponentially. Semiconductors, for
instance, are already being used in cars, toasters, refrigerators,
computers, televisions, even Nike sneakers, almost anything that
processes signals.
"They've been shooting all the tech stocks, even the ones that don't
have exposure in Asia," said Thomas Thornhill, director of technology
research at Nationsbanc Montgomery Securities. "But that's going to
be corrected because the end consumption of technology remains on a
relatively constant, upward trend."
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