THREAD---Lucent Technologies Inc.
Dow Jones Newswires -- June 4, 1999
SMARTMONEY.COM: The New Darlings Of Tech
By Tiernan Ray
Smartmoney.com
NEW YORK (Dow Jones)--When would the mad, unreasonable selling end? Cisco Systems
(CSCO), the company that virtually owns the networking industry, was down at 105 on Wednesday
and barely clawing its way back to respectability late Thursday. Clearly, if investors would sell Cisco,
then they would sell virtually anything. They would bid poor Lucent Technologies (LU) down to 59
7/16 as of Thursday afternoon, where, trading at 50 times this year's expected fiscal earnings of
$1.19 per share, it had become simply expensive, a mere shadow of its former ridiculously expensive
self.
Well, obviously, the mad, unreasonable selling has abated as of Friday morning, with Cisco up almost
3% at 111 7/8 and Lucent climbing to 61 1/8. In fact, there wasn't much at all in the way of a broad
tech selloff this week, not, at least, if you were hoping to spot great stocks being simply thrown out
the window, followed by their bankers. I'm aware some readers may well be under water these days,
having purchased Dell Computer (DELL) at 55 back in late February. At 33 1/8, Dell trades at 45
times this year's expected earnings of 73 cents per share, not too pricey. But what's also happened is
that money has shifted to cell-phone-technology maker Qualcomm (QCOM), bidding it up to an
astounding 103 as of Thursday, giving it a forward P/E of 51 based on year-2000 expected earnings
of $2.00 per share and a 313% return for the past six months. All that based mostly on the fact that
Qualcomm is putting much o fits CDMA technology for wireless into the hands of Ericsson (ERICY),
which at a recent 28 9/16 is trading at only 38 times this year's expected earnings of 74 cents per
share. Now there's a stock to think about buying.
No, I think we saw less than a broad selloff through Thursday, more like some tactical bets being
placed by investors, with money coming out of the old industries, such as the PC business, and
moving into communications companies, where many fund managers will likely be piling their money
in increasing allotments in coming years. And why not? My friends at the Dell'Oro Group, which
tracks the networking industry, say money continues to pour into equipment for so-called wide-area
networking, the pipes that connect businesses to one another. Data for the first quarter shows sales of
so-called access concentrators, a category that includes cable modems, were up more 23%. There's
continuing growth here because the Internet is a multiyear project.
On the other hand, investors are taking a second look at the enormous supply of Internet stocks. A
year ago, you couldn't really make an index of Internet stocks. Today, there are at least a hundred
companies that matter. But supply continues to grow dramatically, even as investors realize that
Amazon.com's (AMZN) projects are taking longer to bear fruit, as we wrote in this space a few
weeks back.
Meanwhile, the investors who really count - the ones who get to set their own price - are still piling
money into the market. Venture Finance, a monthly newsletter put out by Technologic Partners in
New York, announced the other day that private investments by venture capitalists continue to flow
into high tech start-ups at a record clip. In the first quarter of this year, private investors put an
amazing $4 billion into 600 Silicon Valley start-ups, which means they are easily on track to best last
year's total of $12.4 billion for 1,700 companies by the third quarter of this year, as has happened in
the past two years.
This money went into some of the so-called hot start-ups that will no doubt soon go public, many of
them communications companies, including Network Alchemy, a Santa Cruz, Calif., company
building private networks for businesses, and ITXC, a Princeton, N.J.-based start-up that provides
settlement services to the telecom industry, specifically for telephone calls made using the Internet.
The question is, are the venture capitalists ahead of the market, or, given last week's awful showing
for Barnesandnoble.com and the lackluster trend in Net stocks this week, are these investors trailing
the market, pouring money into hopes of public offerings that are already over?
No, I think private investors realize that the M&A market in technology will buy many of their good
ideas, even if the public market won't. The networking companies in the pipeline and the
telecommunications-services companies are part of the vast building project of the Internet, and that
means plenty of growth lies ahead.
The public market has picked up on this, and as a consequence, there's too little selling, if anything, in
some of the best names. Back in late February SmartMoney magazine looked at eight tech stocks
we're in love with. Even then, the stocks were trading at unruly premiums, relative to their historic P/E
multiples. We set some target prices we thought they might fall to, where they'd be a buy. PRI
Automation (PRIA), a chip-equipment company, has fallen below our target price of $27; it's trading
at 26 3/8 Friday morning. The others never came close, having soared since we made our findings.
With the amount of premium left in the SmartMoney picks, and in gems like Cisco, we could use a
little more selling, a little panic. No, we're not seeing massive dumping of techs, but we are seeing
something else that's an interesting trend. Unlike nine months ago, investors are not clinging to their
Internet stocks for dear life as the waters rise and as they fear the market fundamentals may be
coming unhinged. The Amazon's and Yahoo!'s (YHOO) have lost much of their status as a security
blanket for the tech crowd.
Net stocks may well recoup some lost ground in the next couple of weeks as investors start to focus
on second-quarter profits. I personally think Amazon and others will. And I think the public market
will resuscitate itself. First Call thinks the second quarter will be the best of the year, with profits up
13%. Profits for the third and fourth quarter are cur rently expected to be up 24% and 25%,
respectively, but those estimates will come down substantially as we move into the summer.
And then what? Christmas anticipation? A second-half bump from the PC market as the Y2K
disaster sparks spending on information technology? There's no sign of it, yet. Trading at around 51
on Thursday, Intel (INTC) may be worth a second look. Generally, though, it's going to be the
communications sector that has the strength going into the rest of this year. Communications for the
Internet, and perhaps in select areas of the networking market, such as the fiber channel companies
we recently reported on. To the Lucents, the Ciscos and the Nortels (NT) is where most of the smart
money in tech will migrate over the rest of this year.
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