Lashinsky tries to be Herb Greenberg once again... [ASND references]
sjmercury.com
Posted at 10:14 p.m. PDT Tuesday, September 1, 1998
Tech stocks' outlook varies
Companies come in various shapes, size, degrees of risk.
BY ADAM LASHINSKY
Mercury News Staff Writer
ASKING how ''tech stocks'' are doing is somewhat akin to inquiring about
the weather in the Bay Area.
Sure, it's late summer going on fall all over, but San Jose's dry heat bears little
resemblance to San Francisco's cold, rolling fog. Similarly, Internet leader
Yahoo Inc. (Nasdaq, YHOO) and top chip maker Intel Corp. (Nasdaq,
INTC) -- headquartered nearly cheek-by-jowl in the heart of Silicon Valley
-- bear about as much resemblance to each other as the climates in the two
aforementioned cities.
With that in mind -- and with the flip-flopping of all kinds of stocks in recent
weeks -- it's a good time for a broad check on the ''tech sector'' to see
where it's been and where it's going.
Investment analysts seem to agree that ''tech'' is a great place to put one's
money over the long haul. And the various sectors are interconnected, of
course. Woes in semiconductor equipment are a direct result of the slowdown
in chips, for example.
But as the following partial review makes clear, technology companies come
in such different shapes and sizes that investors must consider each group
before deciding where and when to plunk down their money.
COMMUNICATIONS: There are basically two kinds of communications
equipment companies in and around Silicon Valley: Cisco Systems Inc.
(Nasdaq, CSCO) and everyone else.
All the companies in the sector supply various parts of the ''plumbing'' that run
computer networks. The biggest difference between Cisco and its
competitors, such as 3Com Corp. (Nasdaq, COMS), Bay Networks Inc.
(Nasdaq, BAY) and Ascend Communications Inc. (Nasdaq, ASND), is
that the others all have tripped over falling prices and difficult acquisitions and
Cisco hasn't.
''It varies so much,'' says Paul J. Weinstein, who follows the sector for Credit
Suisse First Boston Corp. in San Francisco. ''If you take Cisco out of the
mix, they've all been struggling with lower price points.''
And that's led to slower growth rates and falling stocks. 3Com, for example
has lost 27 percent of its value this year while the broad stock market, after
Tuesday's bounce, is hovering around where it started.
If the sector's stocks are good buys now, and Weinstein generally thinks they
are, it's because investors have adjusted their perceptions of how quickly the
growth will come.
''We're at a point where we went through this inflection where 50 percent
growth became 15 percent growth,'' says Weinstein. ''Now people are much
more grounded in reality. People's expectation have come down.''
Weinstein still has concerns. Larger economic woes won't spare networking
stocks. And if network operators and phone companies slow the pace of
conversion to new technologies, equipment companies will suffer.
''If there's one thing that's not going to change, it's the pace of acquisitions,''
adds Weinstein. And that makes any company with strong products a
potential takeover candidate.
Any company but Cisco, that is.
INTERNET: No tech sector has attracted more investor interest than ''the
Internet,'' that love-'em/hate-'em catch-all phrase that encompasses everything
from new search-engine directory companies to software concerns
specializing in the Web.
What unites Internet companies in 1998 has been a lack of profits, explosive
initial public offerings and valuations that are so different from those of
companies in other industries that analysts have scrambled for new models to
justify them.
Over the past few days, though, Internet stocks have gotten their
comeuppance, giving investors new opportunities to pick winners and losers.
''Generally speaking, the ones that will come back first are the ones that are
profitable,'' says Steven R. Horen, who tracks the sector for NationsBanc
Montgomery Securities Inc. in San Francisco. ''Having said that, if we have
more down days, they will give up their gains. I have no doubt about that.''
For example, one of the first ''Internet'' stocks Horen noticed rebounding
Tuesday was Intuit Inc. (Nasdaq, INTU), slaughtered Monday and up 17
percent Tuesday. The company makes money and has a solid business, notes
Horen.
As for unprofitable start-ups and even publicly traded Internet companies --
so plentiful that cartoonist Gary Trudeau has taken to parodying one in his
''Doonsebury'' strip -- Horen applies a similar gauge.
''The companies that are expected to break even soonest will be the ones that
will come back first,'' he says. ''In terms of IPOs, the clearest statement you
can make about building a defensible franchise, the easier it will be to bring
public a company that is not yet profitable.''
Horen's not a long-term fan of search-engine stocks, but does think they
remain takeover candidates for media companies.
Says he: ''If you're investing in those companies, that's your play.''
PERIPHERALS: With the possible exception of semiconductor capital
equipment, no sector has been buffeted like disk drives for personal
computers. Unlike Cisco in networking or Microsoft Corp. (Nasdaq,
MSFT) in software, there is no drive maker whose stock hasn't taken it on the
chin.
The explanation is familiar: Clogged inventories.
But the disk-drive sector alone has a ''leader'' in Seagate Technology Inc.
(NYSE, SEG) that has lagged its competitors in bringing products to market.
Its efforts at maintaining market share socked the industry at a tough time.
''The biggest change in the last year was when Seagate -- which was the only
company that had raised money at that point -- went to war over pricing,''
asserts Bruce S. Seltzer, an independent analyst specializing in disk drives.
There were other factors, of course.
''PC makers also decided they wanted less capacity, not more,'' Seltzer
explains. ''They were more concerned with cost than performance.''
Seltzer, who advises institutional investors on the sector, isn't optimistic for a
near-term turnaround.
''Traditionally inventory cycles have taken three to four quarters to clear,'' he
says. ''This one looks like it's taking longer.''
There's a chance, he says, that holiday purchases of PCs could rejuvenate the
drive makers. As the first quarter is typically slow, though, a poor Christmas
would mean drives might not recover until summertime.
SOFTWARE: If any sector hummed along seemingly without a care in the
world it was enterprise software, the products for which big businesses pay
big bucks to help manage their operations.
That, too, has changed over the last year, first when Oracle Corp. (Nasdaq,
ORCL) reported sharply slowing growth and later when stalwarts like SAP
AG (NYSE, SAP) and PeopleSoft Inc. (Nasdaq, PSFT) said robust growth
might simmer.
A prime culprit has been ''Y2K displacement,'' spending to fix problems of
the computer millennium bug instead of on new applications or databases.
''Because there are some companies that have missed numbers and because
there's been some slowing of growth, there's been some fear in this sector,''
notes software analyst Brian E. Skiba of Lehman Bros. Inc. in San Francisco.
There are bright spots -- and companies with bright prospects -- says Skiba.
Systems-management software makers like Legato Systems Inc. (Nasdaq,
LGTO) have ''improving fundamentals,'' he says.
But in general, Skiba believes ''the big are getting bigger and stronger, and the
laggards are lagging more.''
Interestingly, though Skiba remains cautious on Oracle -- whose stock is back
to where it was when it collapsed at the beginning of the year -- he finds
reason for hope.
To wit, the company's ''tough comparisons'' will end after its current quarter,
the last in which Wall Street will measure Oracle against its year-ago
high-flying self.
''The game is not over,'' Skiba says. ''But it comes down to execution for
them. They're big enough that they're not going to go out of business.''
Damning with faint praise, perhaps. But also a possible early indication of an
eventual turnaround.
SEMICONDUCTORS: To grasp how semiconductor stocks have fared in
the tech sell-off, look no further than the see-sawing of industry leader Intel.
After charging forward for much of the decade, Intel's stock has been stuck
between $70 and $100 since the middle of last year.
The reasons: falling prices, industry overcapacity and slowing growth in
personal computers.
To some, like Intel bull Mark Edelstone of Morgan Stanley Dean Witter Inc.
in San Francisco, the negative factors have about run their course. Most
important, Edelstone believes, excess global capacity has passed its worst
point. As chip makers have drastically reduced their capital spending, the time
will come in late 1999 or 2000 when chip supplies run short.
''In the second half of 1999 you'll see a much more benign pricing
environment,'' says Edelstone, meaning chip manufacturers will be able to
charge more. If that seems like a long time away, Edelstone has an answer:
''If you wait 'til then, it's too late.''
Among the improvements Edelstone discerns in the semiconductor
environment is the indication that PC makers have cleared out their excess
capacity. That means new computers -- assuming consumers want to buy
them -- will require new chips.
''The worst of the excess capacity problem was in the second quarter,'' and
as that situation improves ''the company that benefits the most is Intel.''
Contact Adam Lashinsky at the San Jose Mercury News, 750 Ridder
Park Drive, San Jose, Calif. 95190, or siliconstreet@sjmercury.com or
(408) 271-3782.
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