Nasdaq has set a bottom on April 4! Add quality now!
Views from the street on tech stocks
The Nasdaq Composite Index rose for the fifth straight session, gaining 106.71 to 2,305.59. The Dow Jones Industrial Average rose 36.18 to 11,337.92 and the Standard & Poor's 500 index added 20.87 to 1,312.83. Be very wary of rallies, because light volume will take prices back down quickly. Volatility can peck away at your holdings if you jump in to surges in stocks. Now is the time to add quality tech companies, averaging in over the summer to take advantage of the real recovery in 2002
Tech stocks were determined to climb today, even Advanced MicroDevices (AMD) and Intel (INTC), which rose in the face of Merrill Lynch downgrades. Technology felt the first blows of the economic slowdown and will likely be the first sector lifted by the recovery -- but a long summer of light volumes and volatility will keep valuations from rising significantly until a major tremor passes through the wider economy. The recession didn't hit the consumer economy until very recently. It will raise a variety of fears about the tech sector.
Assuming, as most folks do, that the market prices stocks about six months ahead of actual performance, there is a lot of evidence that the Nasdaq set a bottom on April 4. Even as slowing sales for consumer goods and retail companies this summer tests the Dow, the Nasdaq will weather the summer in a fairly narrow range. It will not break through 2,800, inspite of Philips expectations announced today that semiconductor industry sales would be down 20% in 2001, and the Dutch group said it might close its mobile-phone division.
My idea is that the technology recession has significantly passed because manufacturing and corporate IT spending was scaled back late last year after the Y2K repair cycle; that decrease in spending after a hugely accelerated upgrade cycle in 1998 and 1999 was exacerbated by growing concerns about the economy in general. As the "old" economy hits bottom, companies will begin to invest in IT and improve productivity once again.
A very important issue is the age of current corporate PCs. If the bulk of corporate PCs were last upgraded in 1998 or 1999, the typical office worker is sitting in front of a two-to-three-year-old computer. Windows has been upgraded twice in that time (Window 98 and 2000, and soon Windows XP). Applications are rapidly outpacing the Pentium II and early Pentium III processors that run these machines.
Pretty soon, whether corporations like it or not, they will have to upgrade. I predict that upgrade cycle will begin in earnest in early 2002, as the recession in consumer sales is easing in the wake of the Federal Reserve's continuing cuts. At some point, money will be so cheap that capital expenditures will be affordable even in the face of a slow economy. This leaves a lot of room for volatility, as well as the potential for a 16% Nasdaq gain by the fall. Of course, if the Nasdaq were to hit 2,550, it would be up a mere 3.2% from the beginning of the year.
Analyst Joe Osha lowered his second-quarter and full-year earnings estimates for the Intel and expressed doubts about the company's numbers in 2002. Shares of Intel still gained 1.14 to 29.90. Intel was already headed into earnings warnings territory because some other semis that have reported recently seem to indicate that Q2 is turning out worse than expected. Intel's stock price may well increase if the markets start a run, however, I think this is not very likely. Indeed, the Fed has shot its wad, the Congress has effectively passed the tax cut. All the ammunition has basically been fired in order to scare off the recession. Soon we will start to get a clearer picture of how bad Q2 is going to be (its going to be much worse than expected). Then the question will be whether Q3 is going to be a turnaround quarter, a flat quarter, or even worse. I personally believe that the markets will see with the Q2 earnings news that Q3/4 are not going to be rebound quarters and that we will not see earnings turn until Q1/2 2002. Thus look for at least one more major market pullback before fall.
Shares of AMD rose 1.91 to 34.40 after Osha cut his estimates for the chipmaker and maintained a "neutral" intermediate-term rating for the stock.
Another large cap company that helped the Nasdaq rise was Oracle (ORCL), which added 1.82 to 18.10. Oracle is in a dogfight that it might not be able to win. "As to the ORCL's woes of late, I believe the street is betting that IBM will be the victor of the database battle. All of those IBM camp stocks, SAP, PSFT, SEBL, and of course, IBM have done well lately. ORCL has to fight everyday for its life. I think many so-called street-smart people are equating this battle like PC vs Apple type of fight. IBM has no application. It is selling database and internet infrastructure software. It has a slew of consultants to help sell its software. Just like MSFT's open operation system with thousands of programmers developed useful application programs. Will ORCL be able to fight it out with its own resources? ORCL may have to discount its core product, database, as well as proves to its clients that ORCL 9i is both cheaper and better than the best of the breed approach.
Current situation is very muddy. We, ORCL longs, are investing based on the faith that LE's vision will save the day. The Street thinks otherwise. It is a gamble. The Street has been wrong before. If the Street is wrong, the pay off is huge for ORCL faithful. If the Street is right, ORCL will be in the single digit soon and ORCL will eventually go the way Apple is now.
Dell (DELL) is poised to take full advantage of the downturn to build market share. The company, even though it saw flat profits year-over-year, maintained margins in the face of a price war. Granted, Dell initiated the price war by leveraging rapidly falling semiconductor prices to attack its nearest competitors. That also means that Dell is in the best position to stop the war, presumably when it has achieved the goal of increased market share. In that column, I compared Dell's potential to Compaq's (CPQ) prospects. Based on the stronger-than-expected results by Hewlett-Packard (HWP) and CEO Carly Fiorina's comments that the company hit bottom, combined with Dell's 27% increase in unit sales worldwide and its improving sales of workgroup servers, Compaq could be losing ground. Both Dell and HP indicated they may see flat or slightly lower revenues in the next quarter, but inventory problems don't seem to be as great a concern as three months ago. This is perfectly reasonable guidance in the current market and in the midst of the battle of the price tag. Dell is a very attractive buy at these levels.
The tech company most likely to be hurt most this summer is Palm Inc. (PALM), the maker of the leading handheld operating system and hardware. Palm announced late Thursday that it will see fourth-quarter revenue as wide as 50 percent below previous guidance. Palm blamed frozen demand on delayed shipment of its new m500 handhelds, saying that consumers are waiting for these devices. I think it is far more likely that consumers are scaling back on such purchases. Even if Palm wants to think of its product as a corporate-productivity tool, it seems, based on the conversations I have with Palm owners, that the typical Palm handheld is purchased by an individual. Many of these are expensed to employers, but the buying decision remains personal. As consumers become more conservative amidst news of layoffs and corporations tighten belts, it is understandable that Palm devices will not sell as quickly.
Does this change Palm's future prospects? Not exactly. It does indicate that this is a cyclical stock, but the company will still prosper if handhelds in general are suffering in the short-term. The metrics to watch closely in the next six months are the sales of handhelds based on Microsoft's (MSFT) Windows CE operating system, marketed as "PocketPCs." A sudden bump in PocketPC sales or market share will indicate that Palm itself is stumbling. I would add Palm shares as a speculative investment, if you believe as I do that the consumer will come back to this platform.
Lagging volumes in recent weeks indicates that the summer will be dominated by retail investors as institutional traders take their vacations for a few more weeks than usual. Wednesday's rally, while it was good for many tech leaders, saw very little institutional support for issues like Cisco Systems (CSCO), Sun Microsystems (SUNW), Intel (INTC) and EMC (EMC). That means individual investors need to avoid becoming too carried away when individual equities or the Nasdaq as a whole soar on light volume. Until the institutions come in strongly, gains will be built on thin air and wishes.
Following up on our Xbox musings earlier a couple of weeks ago, AOL Time Warner (AOL) has extended its brand of online world domination to gaming platforms. With its announced deal with Sony (SNE) to offer the service through the Playstation 2, AOL both helps to solidify the 18- to 34-year-old demographic as well as add a dimension to the gaming platform that competes with Microsoft's (MSFT) Xbox, which comes with a high-speed Internet-access plug.
Interesting as that all is, who do we see floating around the periphery of the recently announced AOL/EMI (EMIPY)/Bertelsmann MusicNet music deal? None other than software producer RealNetworks (RNWK). The music deal popped RealNetworks shares up a couple of bucks to its current $9.31 from about $7 in April. And while the consensus projected earnings per share are quite small over the next couple of years – about a dime for 2001 and 14 cents for 2002 – RealNetworks seems to be consistently in the right place at the right time.
As an aside, RealNetworks and Nokia (NOK) announced a new deal Wednesday for a new TV tuner and Internet device. RealNetworks will be involved in Nokia's Media Terminal -- an infotainment device for the home. If you line up the folks in all the recent deals -- MusicNet, Playstation 2, Nokia -- the pedigree is impressive. The challenge now for RealNetworks is to milk these deals until the udder squeaks. Analysts seem lukewarm towards RealNetworks. I guess I understand that approach, given the fundamentals. Ratings run the narrow gamut between the nether worlds of "accumulate," "market-perform," "attractive" and "buy." Target prices are unchanged from April ranging from the mid-teens and low $20s. The market cap has crept up to $1.5 billion while trailing 12-month revenue as of March 31 is about $240 million area. And while the price/earnings ratio against projected 2002 earnings of 14 cents a share is a hefty 66 times, at least it has a pulse compared with dot-com peers. And great prospects.
The reality is that a purchase of RealNetworks makes a statement that the investor is convinced that the growth, viability and ease-of-use of streaming products online is a sector not to be missed. RealNetworks is the world leader in the space. It seems to be included in just about every new thing that comes up, be it new Internet-delivery services, mobile phones or PDAs.
My sense is that we're a ways away from the technology becoming readily accepted until things like security and price points stabilize. While it's a bit of a leap to think of watching an NBA game on your Palm (PALM)/Visor gizmo, it's not when one thinks of music delivery. And whom among us freelancers wouldn't like picture-in-picture on our Powerbooks during the playoffs? Over-40s such as moi may not be the target audience, but the echoes or whatever we are calling the under-30 crowd these days will grow up with this stuff and it will no doubt eventually be imprinted in their instant gratification world. RealNetworks interests me, though, I would take a long-term view -- some now, some later. Instead of buying a narrow new technology, RealNetwork's offerings are diversified over several platforms and products. Sort of like buying a supplier to a vibrant industry. And a long-term proxy on cool. |
