An article out of the NY Times today...
December 15, 1997
Tumbling Technology Stocks: Problems Go
Beyond Asia
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By DAVID BARBOZA
he 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." |
