Tech Stocks (What Else?) Are the Rage of Europe.
ÿÿÿ Notice
-Wireless theme
-exploding telcos
-exploding wireless internet
-NN very strong in Europe
TA
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Barron's ,DECEMBER 13, 1999
ÿÿÿÿÿÿÿÿÿÿÿÿ Tech Stocks (What Else?) Are the Rage of Europe
ÿÿÿÿÿÿÿÿÿÿÿÿÿ By Leslie P. Norton
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Much has been made of the widening chasm between the
ÿÿÿÿÿÿÿÿÿÿÿÿÿ new and the hidebound Asia, between New Japan and Old
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Japan, say, or between the Korea Stock Exchange and
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Kosdaq. Yet the gap separating Old and New Europe also has
ÿÿÿÿÿÿÿÿÿÿÿÿÿ grown large. That was strikingly apparent last week when
ÿÿÿÿÿÿÿÿÿÿÿÿ Nokia surpassed the market cap of British Petroleum to
ÿÿÿÿÿÿÿÿÿÿÿÿÿ become Europe's largest company. (It also means
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Denver-based growth investor Janus Capital, which has
ÿÿÿÿÿÿÿÿÿÿÿÿÿ 5%-plus of Nokia's shares, now has more than $11 billion
ÿÿÿÿÿÿÿÿÿÿÿÿÿ sewn up in the Finnish cell-phone maker.)
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Sure, Mannesmann, the German wireless outfit now under
ÿÿÿÿÿÿÿÿÿÿÿÿÿ pursuit by Vodafone AirTouch, was off its high for the week,
ÿÿÿÿÿÿÿÿÿÿÿÿÿ but it's still up 133% this year. And notwithstanding the euro's
ÿÿÿÿÿÿÿÿÿÿÿÿÿ slide or the European Central Bank's suggestion that it will
ÿÿÿÿÿÿÿÿÿÿÿÿÿ raise interest rates at its next meeting, European tech issues are
ÿÿÿÿÿÿÿÿÿÿÿÿÿ on a stunning tear. So much for the millennium bug. Demand is
ÿÿÿÿÿÿÿÿÿÿÿÿÿ likely to come not just from Europe, but also from U.S.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ institutions fretful about a peaking U.S. economic cycle and
ÿÿÿÿÿÿÿÿÿÿÿÿÿ their huge tech exposure at home.ÿÿÿÿ
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Unlike Japan, which has Softbank, Europe doesn't have a real
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Internet bellwether. Internet issues are just 0.3% of the
ÿÿÿÿÿÿÿÿÿÿÿÿÿ European market, versus 6.8% of the U.S.ÿ
ÿÿÿÿÿÿÿÿÿÿÿÿÿ That may change,
ÿÿÿÿÿÿÿÿÿÿÿÿÿ given the appetite for initial public offerings of ISPs like
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Freenet.de, a unit of Mobilcom, and Terra Networks, a unit of
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Telefonica d'Espana. Last week, Freeserve, the U.K. ISP, set a
ÿÿÿÿÿÿÿÿÿÿÿÿÿ new high. Publisher Reed Elsevier jumped on disclosing new
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Internet investments. Other New Europe plays gained.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Marconi, the communications equipment provider that was
ÿÿÿÿÿÿÿÿÿÿÿÿÿ formerly the defense contractor called GEC, also rose.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ By 2010, tech and telecom issues will account for nearly 40%
ÿÿÿÿÿÿÿÿÿÿÿÿÿ of the DJ Eurostoxx index, predicts Peter Oppenheimer,
ÿÿÿÿÿÿÿÿÿÿÿÿÿ HSBC Securities' chief strategist. That's up from around 18%
ÿÿÿÿÿÿÿÿÿÿÿÿÿ now. Oppenheimer analyzed the cash flows of the index's tech
ÿÿÿÿÿÿÿÿÿÿÿÿÿ and telecom members, then discounted them back. Assuming
ÿÿÿÿÿÿÿÿÿÿÿÿÿ a 30% premium to the wider market, such companies would
ÿÿÿÿÿÿÿÿÿÿÿÿÿ account for 37% of the market by 2010 -- a roughly similar
ÿÿÿÿÿÿÿÿÿÿÿÿÿ weighting to the U.S. At the current 40% premium, the
ÿÿÿÿÿÿÿÿÿÿÿÿÿ proportion rises to 63%. That doesn't include any impact from
ÿÿÿÿÿÿÿÿÿÿÿÿÿ new entrants.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Among the stocks that shot higher this week were Arm
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Holdings of the U.K., which licenses its design for embedded
ÿÿÿÿÿÿÿÿÿÿÿÿÿ processors to companies like Intel, LSI Logic and Lucent.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Arm has increased 23-fold since it was listed on the London
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Stock Exchange and Nasdaq in April 1998. Arm and CMG, a
ÿÿÿÿÿÿÿÿÿÿÿÿÿ telecom supplier, climbed as they were added to the FTSE 100
ÿÿÿÿÿÿÿÿÿÿÿÿÿ index.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Arm's gain means it's now the largest position in Morgan
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Grenfell International Select Equity, a mutual fund that's up
ÿÿÿÿÿÿÿÿÿÿÿÿÿ 76% this year. (Deutsche Asset Management, Morgan's parent,
ÿÿÿÿÿÿÿÿÿÿÿÿÿ owns 10% of Arm.) Concedes Patrick Deane, the fund's
ÿÿÿÿÿÿÿÿÿÿÿÿÿ manager: "The link between balance-sheet assets and
ÿÿÿÿÿÿÿÿÿÿÿÿÿ profitability has been severed." Yet, Deane suggests, there is
ÿÿÿÿÿÿÿÿÿÿÿÿÿ "sizable upside" left in Arm. He sees licensing revenues
ÿÿÿÿÿÿÿÿÿÿÿÿÿ growing 30% a year for the next five years. But the real upside
ÿÿÿÿÿÿÿÿÿÿÿÿÿ comes from the royalties, which Deane sees surging 55% a
ÿÿÿÿÿÿÿÿÿÿÿÿÿ year, as forecasts of digital mobile-phone sales are revised
ÿÿÿÿÿÿÿÿÿÿÿÿÿ upwards, and new digital products such as palmtops, set-top
ÿÿÿÿÿÿÿÿÿÿÿÿÿ boxes and smart cards are introduced. Some 875 million
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Armbased units will be shipped by 2004, yielding revenues of
ÿÿÿÿÿÿÿÿÿÿÿÿÿ 300 million ($489 million), versus 42.3 million in 1998. "Given
ÿÿÿÿÿÿÿÿÿÿÿÿÿ the implicit high gross and operating margins, much of this
ÿÿÿÿÿÿÿÿÿÿÿÿÿ turnover will be turned immediately into cash," says Deane.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Since Arm now trades at 21 times 2004 sales, Deane's
ÿÿÿÿÿÿÿÿÿÿÿÿÿ investors hope so too.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ The gains bemused even jaded observers like Nick Hiley, who
ÿÿÿÿÿÿÿÿÿÿÿÿÿ sells European stocks to U.S. institutions for Commerzbank.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ The "fever" for technology stocks, Hiley observes, has now
ÿÿÿÿÿÿÿÿÿÿÿÿÿ spread to content providers. Last week, shares of German
ÿÿÿÿÿÿÿÿÿÿÿÿÿ broadcaster ProSieben Media, controlled by media titan
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Thomas Kirch, advanced after BskyB said it would buy 24%
ÿÿÿÿÿÿÿÿÿÿÿÿÿ of KirchPayTV of Germany. BskyB is 40% owned by Rupert
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Murdoch's News Corp. and 25% by France's Vivendi, which
ÿÿÿÿÿÿÿÿÿÿÿÿÿ also owns half of French pay-TV outfit Canal Plus.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Other gainers included auction companies like QXL.com,
ÿÿÿÿÿÿÿÿÿÿÿÿÿ which is linking Excite@Home customers to its European
ÿÿÿÿÿÿÿÿÿÿÿÿÿ sites, and ricardo.de, the German auctioneer. At 25 times 2000
ÿÿÿÿÿÿÿÿÿÿÿÿÿ sales, Ricardo still trades at a steep discount to eBay, which it
ÿÿÿÿÿÿÿÿÿÿÿÿÿ recently replaced as the auctioneer on T-Online, Deutsche
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Telekom's Internet site.
ÿÿÿÿÿÿÿÿÿÿÿÿ And others connected toÿ
ÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿ the new WIRELESS INTERNET THEMEÿ
ÿÿÿÿÿÿÿÿÿÿÿÿÿ prospered.ÿ
ÿÿÿÿÿÿÿÿÿÿÿÿÿÿ Ericsson leaped after agreeing to create a joint
ÿÿÿÿÿÿÿÿÿÿÿÿÿ venture with Microsoft and use a Microsoft browser in some
ÿÿÿÿÿÿÿÿÿÿÿÿÿ handsets. The pact initially bashed shares of Psion, the
ÿÿÿÿÿÿÿÿÿÿÿÿÿ hand-held-computer maker working with Ericsson, Nokia and
ÿÿÿÿÿÿÿÿÿÿÿÿÿ others to create a new operating system, called EPOC, for cell
ÿÿÿÿÿÿÿÿÿÿÿÿÿ phones. But Psion shares recovered from a 40% loss after
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Ericsson said it wouldn't abandon EPOC.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Some Old Europe shares went along for the ride. The
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Ericsson pact initially lifted shares of Investor AB, the big
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Swedish holding company controlled by the Wallenberg
ÿÿÿÿÿÿÿÿÿÿÿÿÿ family, but the gains evaporated. Investor owns just 3% of
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Ericsson, but controls 22% through supervoting shares.
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