Hi Kemble!
Tomorrow's IBD article on DELL, and tech sector, and Y2K. Agree with the writer that these worries are really grossly inflated. Again an analyst, Ed Yardeni of Deutsche Bank (I think), made a name for himself with his dire forecast of nuclear winter, with the full support of CNBC and the press. The worst thing is when these forecasts become self-fulfilling prophesies.
Best Wishes,
Sam
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The nuclear winter for technology spending - sparked by concerns about the Y2K software bug - now looks to be nothing more than a brief storm.
As the doomsday date draws near, analyst forecasts have become less menacing and big technology suppliers have provided mostly positive guidance. Wall Street professionals are beginning to look ahead to strong prospects next year and even see a healthy second half as a distinct possibility.
I N V E S T O R ' S C O R N E R
A major change in perception occurred last month, when Intel reported a downside earnings surprise. But the real surprise for some was how bullish the dominant PC chipmaker sounded about the rest of the year.
While tech stocks in general have been weak since mid-July, shares of Intel have been on a roll, breaking out of a seven-month base to a new high.
Earlier in the year, many industry analysts had been forecasting that spending on computer hardware would be unusually strong in the first half of the year, as companies integrated new systems well ahead of any potential fallout from Y2K. Corporate America would stop new purchases in the second half so they could remain certain their systems were ready for the new millennium.
But when Intel reported its second-quarter numbers, it said it saw the usual seasonal weakness. U.S. Bancorp Piper Jaffray analyst Ashok Kumar says about 45% of PC purchases are usually made in the first half of the year and 55% in the second half. He thinks the split could be even more heavily weighted in the second half this year.
With Intel controlling about 80% of the PC chip market, Kumar says the company is about as good of a proxy as you can get for the PC industry outlook. If Intel says things look good, you can pretty much take that to the bank. ''Intel manages its forecasting very well,'' he said.
One factor benefiting Intel and the PC industry is the emergence of ''free PC'' promotions, which allow consumers to purchase computers at bargain prices, as long as they commit to long- term Internet access contracts.
Of the PC makers, Gateway and Apple, which are both consumer oriented, should face little risk related to Y2K, says Mike Tucker, an analyst at Federated Investors. It manages the Federated Capital Appreciation fund, which carries an A- rating from IBD based on 36-month performance.
Compaq Computer's stock is already near a 52-week low, so Dell Computer ''has the biggest Y2K risk to its stock price,'' Tucker said. But the build-to-order pioneer carries low inventory, he notes. ''It's the best operating model to ride you through Y2K.''
While Intel presented a favorable outlook, Microsoft, another tech bellwether, surprised Wall Street with very cautious projections for its fiscal year ending in June 2000. The company projected that revenue growth could fall a bit below 20%, following 29% growth in 1999. It warned that Y2K could have a dampening effect on computer purchases.
Microsoft was mainly expressing its ''typical caution,'' Tucker said. He thinks the company has managed Y2K adroitly, releasing Office 2000 early this year and pushing the release of Windows 2000 early into next year.
One sector that could potentially see a spending slowdown is data storage, says Ned Brines, co-manager of Phoenix-Engemann Growth fund, which has an A- rating from IBD .
Corporations built up their data- storage capacity so they could run their operations and simultaneously conduct testing to make sure their systems are Y2K-compliant. But Brines notes that Engemann funds have large positions in EMC Corp., the leading data-storage provider. Data storage is growing so fast that if there is any slowdown, he says, it will be minor and short-lived.
Selling the stock now due to Y2K worries would be shortsighted, he says. ''We've positioned our portfolio to take advantage of strong corporate technology spending in the year 2000.''
One area Brines likes for getting through Y2K is the telecom-equipment sector, because telecom carriers are having trouble keeping up with the growth in data traffic and can't afford to stop spending. One caveat: Lucent Technologies warned that Y2K concerns might cut into its December quarter.
A sector that's taken a big hit related to Y2K is the enterprise software group, including PeopleSoft and Baan. In this case, it was an actual slowdown in earnings and sales, rather than a projection, that hurt the stocks. Implementing a new business software system can be a 12- to 18-month job, Tucker notes, and many companies have been holding off on such efforts since mid-1998.
''Things have bottomed for that group,'' he notes, and he wouldn't be surprised to see some rebound in activity in the fourth quarter.
The computer services sector, another damaged group, is something of a wild card, Tucker says. ''The big debate is whether there will be as much demand for services after Y2K. |
