analyst Corner forumi Joe Battipaglia, Gruntal & Co.'s chairman of investment strategy, answers
Analyst Corner participants' questions about the Internet and e-business
economy.
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The New Millennium.com
For many years, we have witnessed the evolution of the U.S. economy to a network- and information-oriented model from an industrial-based model because of rapid technological innovation, globalization, and deregulation. This phenomenon is now spreading throughout the world, with the mass acceptance of the Internet accelerating the process. International Data Corporation, a leading technology research firm, recently estimated that worldwide spending on the Internet economy -- which includes e-commerce, information technology infrastructure, and business spending -- should soar past the $1-trillion mark by 2001 on its way to $3 trillion by 2003.
Some fear a burst Internet bubble, but our analysis shows that Internet content and software companies account for only 7% of the overall NASDAQ market capitalization but carry expected long-term growth rates approximately twice those of other rapidly growing segments within technology. Finally, it has become increasingly difficult to partition off technology into a category separate from the industrial economy. The recent decision to add several technology names to the list of Dow Industrials highlights this shift. The term technology as popularly understood will probably lose meaning just as the term industrial lost much of its descriptive value as the industrial age developed and became synonymous with modern times.
E-Mail: jgzengr@aol.com
Name: George Zaf
On which Internet-related stocks would you direct your investment focus for the next three to five years? Has AOL reached its maximum upside potential now that JUNO is offering free Internet service? Is more consolidation of Internet companies forthcoming?
Joe Battipaglia: The key objectives for the Internet in the coming years are to demonstrate profits, broaden its reach (particularly internationally), continue the buildout of high-speed data networks and add value to more mature industries. Valuations aside, I would remain focused on core Internet holdings such as Cisco, Lucent, MCI WorldCom, Yahoo!, AOL, Oracle, Nortel and JDS Uniphase.
Name: Murali Sant
Will high interest rates (6 to 7 percent) prevail from 2001 to 2003? If they do prevail, do you see a slowdown in stock market gains? I am mainly concerned with highly valued Internet companies.
Joe Battipaglia: The bond market seems convinced that the Federal Reserve will raise short-term rates again this year. According to a recent survey of leading economists, 90 percent foresee yet another increase in short-term rates by the Federal Reserve by year-end. However, only a few economists see short-term rates above 6 percent. While I believe that a rate increase is unwarranted at this time, given the current economy, this opinion appears to be in the minority. The Federal Reserve, which raised rates three times in 1999, has had little impact on slowing the real economy and the core rate of inflation remains muted at 2.1 percent year over year. Companies, such as the Internet companies, are not immune to interest-rate pressures; rising expectations for revenue and eventual profit growth carried these sectors through much of the interest-rate concerns of the past year.
Name: Peter Volk
When do you expect the business-to-business e-commerce companies such as Ariba and Commerce One to ramp up their sales based upon the $2 to $3 trillion market estimate? Will their multiples continue to hold or expand? Until when?
Joe Battipaglia: The widely disseminated estimate for business-to-business e-commerce is $1.3 trillion by 2003. The market opportunity here is clearly large for several companies, including Ariba, Oracle, VerticalNet, Commerce One and others. Like other rapidly growing sectors of technology, business-to-business e-commerce should see many new entrants, both market veterans and start-up companies, in the weeks and months ahead. Companies such as those mentioned have been early to enter into agreements with major customers and build communities. Given the size of the potential opportunity and the value of early-mover status in developing an Internet presence, these companies should perform well in the year ahead.
E-Mail: mcarter@lorancg.com
Name: Mcarter
Is the market size to which you refer U.S.-based or worldwide? What firms are best positioned to lead the worldwide market? How far behind the United States is the rest of the world in terms of market size, growth and investment opportunities?
Joe Battipaglia: The United States accounts for roughly 35 to 40 percent of the world's total output measured by GDP. Furthermore, U.S. companies account for 50 percent of the world's total stock market capitalization and profits. Japan, the world's second-largest economy, accounts for only 11 percent and 6 percent of global market value and profits, respectively. Furthermore, over the past decade, the U.S. economy was the only G-7 country to turn in above-average growth - 2 percent in real terms. As the global economy continues its recovery into 2000, I expect U.S. multinationals such as General Motors, International Business Machines, Caterpillar and Merck to parlay growth and increased market share into significantly higher profits.
Name:
After watching the spectacular runup in technology stocks in 1999, do you think there's any upside left for 2000? If so, which areas within the technology universe do you think still have potential for further gains? Are there any areas that you would now avoid?
Joe Battipaglia: I remain of the opinion that technology stocks and the NASDAQ composite will end this year at higher levels. The primary drivers for this growth will be greater earnings visibility, strong underlying demand for products and services and a general perception that technology companies, as defined by the NASDAQ composite, should turn in roughly twice the level of profit growth than the Dow or S&P 500 for the next several years.
Name: Ken
What are your recommended core holdings for long-term investment goals of growth and capital appreciation? What criteria do you recommend for changing a core holding over time?
Joe Battipaglia: Companies that I consider to be long-term holdings are pharmaceuticals, financials, technology and telecommunications. The specific holdings might include the likes of Merck, Citigroup, General Motors, Cisco, Lucent and Intel. The criteria remain the same. I look for companies that consistently meet or exceed earnings expectations; demonstrate the ability to make necessary acquisitions or strategic alliances; are willing to use excess capital to repurchase outstanding shares; and have a cogent and well-defined plan for integrating traditional business and the Internet.
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