FWIW - Todays WSJ
March 17, 1999
Tech Stocks
Bulls Hope Signs of Strength
In PC Sales Will Buoy Market
By MARIA V. GEORGIANIS
Dow Jones Newswires
NEW YORK -- Technology-stock bulls are hoping that new signs of healthy personal-computer sector fundamentals will push the Dow Jones Industrial Average's brief flirtation with the 10000 mark into a longer affair.
In a matter of just a few weeks, investors will realize that first-quarter concerns about underlying demand for PC hardware were blown out of proportion, according to Bob Herwick, principal of Herwick Capital Management.
Several market observers believe tech stocks have finished correcting and should begin to turn around and spill into the broader markets.
"I don't think this market can really rally over 10000 and stay there unless the tech group is joining in a solid way," Mr. Herwick said.
The industrial average touched the 10000 mark briefly Tuesday morning before falling back to show a small loss. The Nasdaq Composite Index gained 7.83 to 2439.27 and Morgan Stanley's high-tech 35 index added 9.34 to 989.53.
The debate over the strength of the PC market began last month when Dell Computer announced fiscal fourth-quarter revenue growth that was below expectations. A few weeks ago, Compaq Computer indicated that its February PC sales weren't as strong as it had hoped.
Last week, bellwether Oracle added to the overall sector concerns when it reported lower-than-expected software revenue growth for the third fiscal quarter.
On the PC front, the first quarter's interruption of the fourth quarter's robust revenue growth, aside from being chalked up to a typical seasonal slowdown, is increasingly being interpreted as affected by a chip transition.
Intel unveiled its Pentium III chip during the quarter. Computer makers, anticipating the transition, eased off shipments of PCs with Intel's Pentium II chip, Mr. Herwick said. So in hindsight, growth is actually "stronger than it seemed in the past couple of months," he said.
"The fundamental backdrop for techs is as good as you can ask for," said Roger McNamee, principal of Integral Capital Partners. "All the evidence so far suggests business as usual" for PC hardware growth, Mr. McNamee said. He noted that he doesn't expect "an enormous number of negative surprises" for the first quarter.
Mr. McNamee said he expects overall PC unit growth in the midteens as a percentage and single-digit gains in revenue.
Market research firms are calling for similar results. International Data Corp. expects 14.3% unit growth world-wide this year and 4.8% revenue growth.
This quarter, IDC expects a "healthy" 14.1% unit growth from a year ago.
Microsoft last week confirmed for many investors the sense that the PC industry is on track for mid-teen growth in units, said Jay Nakahara, a tech-stock portfolio manager with investment company Invesco. The software company's Windows operating systems runs on 90% of the world's PCs.
But other analysts remain cautious and are betting on the sector to continue in a "correction mode."
"A lot of stocks could get cut in half," said William Fleckenstein, manager of hedge fund Fleckenstein Capital. "Anything related to PCs is in big trouble," he said.
The rising importance of sub-$1,000 computers will be a "tremendous crimp" on profits for PC makers and component manufacturers, Mr. Fleckenstein said. In addition, most of the technology purchasing to prepare for the year 2000 computer glitch is already over with, he said.
There has also been a greater amount of talk about declining average selling prices, and the need for investors to focus more on revenue growth than unit growth.
In a recent report, Merrill Lynch & Co. analyst Steven Milunovich said if average selling prices don't improve this year, that could lead to price wars and make it difficult for the top PC makers to meet their revenue targets.
Tuesday's Market Activity
Elsewhere in the tech sector Tuesday, Cyberian Outpost rose 2 7/8, or 16%, to 21 3/8 on the Nasdaq Stock Market. The Web retailer launched an online auction site, OutpostAuctions.com (www.outpostauctions.com).
Xoom.com fell 5 7/8 to 63 3/4 on Nasdaq. The Internet direct marketer filed with the Securities and Exchange Commission to offer four million common shares, two million of which are to be sold by the company, Federal Filings Business News reported. The remaining two million shares will be sold by selling shareholders. The offering includes 600,000 shares for overallotments.
ASM Lithography added 3 1/8, or 7.4%, to 45 9/16 on Nasdaq. Morgan Stanley Dean Witter raised its rating on the stock of the chip-equipment maker to "strong buy" from "outperform."
Go2Net rose 12 5/8, or 11%, to 126 on Nasdaq, marking a second day of sharp gains. The stock soared 26 3/8, or 30%, Monday after billionaire Paul Allen said he agreed to take a controlling stake in the Web portal (see article).
LTX added 7/16 to 5 3/8 on Nasdaq. Needham & Co. raised its rating on the stock of the chp-equipment maker to "buy" from "hold."
Vignette slipped 3 1/2 to 70 on Nasdaq. Morgan Stanley Dean Witter initiated coverage of the stock of the Web-publishing software maker with a "neutral" rating. Hambrecht & Quist started it at "buy." Both were underwriters of Vignette's initial public offering last month.
Think New Ideas added 1/8 to 10 on Nasdaq. Think announced that it has acquired Envision Group, a marketing-services firm that specializes in interactive marketing for automotive and telecommunication clients. Think said the aggregate purchase price won't exceed $9 million in Think New Ideas common stock. Envision has just over 30 employees and was founded in early 1991.
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