Wrestling With Technology
Story Filed: Monday, September 17, 2001 5:16 PM EST
Sep 17, 2001 (JAGfn.com via COMTEX) -- From Hager Technology Research www.Fredhager.comWrestling With Tech
By Scott Shaw
I'm starting off pessimistic here but I promise it gets better and for reasons that I hope I articulate in great detail including why we are most probably at an economic if not a market bottom (I will not even try to predict short-term market moves) and what to do about it. Then I'll comment a bit about Rambus at the end, particularly the ever-changing legal situation, as the situation has taken yet another dramatic turn. Not in actuality yet, but in perception. But it must be said that I woke up this morning thinking, and I couldn't help myself, "just how much more patience do I need before this bloody, stinking stock market turns itself around."
Then I found this sensible bit of advice from Briefing.com: "If you still want to invest in tech you have to discard the short-term trading mentality of the go-go years and start to look longer-term....however, due to the uncertain technical, economic and earnings pictures, this is not a time for overly aggressive behavior... It's okay to start/continue building positions in tech - even now - but do so judiciously... When we finally get more convincing and consistent evidence of a turnaround, then it will be time for more aggressive action."
And boy is this ever an uncertain and panicky time. It is an implosion, a reverse bubble ever bit as bloated as was the period of irrational exuberance. A personal point that demonstrates this effect came from a stock I follow closely and re-bought today, Openwave (OPWV) (not a Fred Hager portfolio stock but one I like). OPWV fell 20in the last two days on (1) a rumor that wireless video on demand in Korea is not taking off as briskly as hoped and (2) comments from a Morgan Stanley analyst that essentially states that Openwave made their earnings last quarter because of some one-time payments. To comment, the former rumor is about as indicative of the future market as a comment in 1994 that initial Internet take-up is not as brisk as hoped, and the latter was addressed, by this very analyst, at the earnings conference call some 25 days ago. In fact, several analysts in the Q&A, including this very analyst, discussed in great detail and quite openly this very issue. Yet now it is new news? No, it is publicity for the analyst and his firm, but nothing new was learned in this report, yet that did not stop it from driving the price down to 2x expected forward revenues and 18x expected forward earnings for the coming year. Yet future growth estimates have not been lowered. So hey, what technology stock is not getting cheap, and some very cheap.
So what I'm doing is holding up my hands, swearing on the winds, and holding to my guns. I know what companies I like in this market. I know technology is not dead as CNBC declared last week, anymore than PC sales would never exceed 350,000 units (as IBM estimated in 1981), or the semiconductor market would never recover from the 1986 crash when Intel was on its last legs, or more relevant to our current situation, that the optical market will never again grow and be a major force in the economy, and that some B.S. publicity piece reiterating news the analyst and all of us knew 30 days ago, is not news that should move a stock, absent one very touchy environment. And unless we end up in a deflationary decade long depression similar to the 1930s, with which our current situation bears no real resemblance, this period of irrational pessimism shall end as well. The great question is when and what to do about it.
As to what to do about it I think the above advice of cautiously building positions in tomorrow's dominant companies, doing so judiciously, even while irrational pessimism may drive us down even further, as long as long-term fundamentals and valuations are sound, is a prudent strategy. Absent an unexpected oil price shock, or other similar event that could put our sensitive economy on its back for years to come, we are through the worse of it, and it has been much worse than I think any person really imagined it would be. Heck I thought we might get cut in half, say to NASDAQ level 2500-3000, and it has still blown me away just how bad this market crash has been. But absent a catastrophic event we are through the worse of it. We simply have the psychology to wade through and need the patience to get through to the other side.
Why am I so confident of this? Here is a list of reasons: the Leading Economic Indicators have risen for the last 4 consecutive months. The Federal Reserve is conducting one of the most aggressive interest rate easings in its history (only appropriate after conducting one of its most aggressive interest rate hikes in history). The monetary base increased 15.7 s of last week (this is an enormously large number and if extended monetary growth of this nature does not stimulate economic growth the economy as we know it is truly dead and I'm heading to Idaho to live off of the land). Earnings reports this quarter are coming in mixed. Although there are still more negative surprises and downward revisions than positive, there were a fair number of positive surprises as well, including some technology companies in the wireless and believe it or not in the semiconductor industry. Then there is the enormous sum of monies sitting in money market accounts afraid to invest in the stock market. 4x as much money is on the sidelines today than has gone into mutual funds. This is just the reverse of 2000. To top it all off Merrill Lynch, despite the berating I'm sure they took for it, came out last week with a report that, after exhaustive analysis, concluded that a sudden and steep change in the optical components market from sequential declines to a sudden and abrupt change to sequential growth by the middle of 2002. Merrill Lynch came to this conclusion while assuming no renewed demand from carriers. It was simply a matter of inventory depletion and obsolescence and that carriers will need to begin buying again one way or another just to maintain what they have.
I also heard hope from even the most shot-up and beat up businesses. Network Appliance (NTAP) for example had the gaul to call an actual bottom. At least this is what Network Appliance President Tom Mendoza very strongly stated in interviews this week and even indicated that he expected a slow and steady recovery over the next few quarters. Easy for Mr. Mendoza to say, given that he exercised $27 million in stock options this year. But Mr. Mendoza is certainly not alone in calling the bottom. As I mentioned last article RFMD made similar comments a few days back, even indicating 10 equential growth and that inventories are becoming "lean." RFMD's competitor Triquint Semiconductor (TQNT) supported RFMD's outlook by reporting a similar market outlook going forward. Then 2.5G is beginning its roll-out in the United States and Europe, as well as 3G beginning to roll-out in Japan and Korea. Not to mention the collateral benefits this all means for companies such as Nokia, IRF, and in the longer-term CREE.
This is not to say all is hunky dory. Some companies will never recover. Some industries are still sometime from recovery. As an example optical component companies such as JDSU and AVNX, along with AMCC and other core chip makers may not even begin to see the light of day until the middle of next year. Fortunately for these companies they have plenty of cash to survive to then and much longer if need be. To put a number on irrational pessimism, Avanex currently trades at a market cap of approximately $400 million. Take away its $200 million in cash and the market only expects Avanex's forward looking business plus non-cash assets and patents to be worth approximately $200 million total, valued into perpetuity. Sadly Avanex has almost reached the price target I set for it a month or so ago, in the $5-$6 range. Then there is Rambus. What is happening with Rambus.
I'm not going to cover Rambus in great detail. I leave that to Fred, Bill, Jim and Eric. But I will cover the legal aspects as is warranted. The slide in Rambus' stock began when Infineon brought a new motion in front of Judge Payne that requested that Rambus be prohibited from pursuing patents against Infineon's DDR products that are also part and parcel of JEDEC's SDRAM standard. A way Infineon's lawyers dreamed up to get around the over turning of the DDR fraud verdict. If granted, this motion would put a crimp, not an insurmountable one, but still a big crimp in future DDR litigation against Infineon. The odds of Judge Payne granting this request in total are probably not very large. But it is possible Judge Payne could grant this request by Infineon, or grant just a portion of this request. I believe this is part of what has the market spooked. In addition there is the rumor of Intel accelerating its launch of its DDR compatible chip to November. In tandem this has proven to be a disastrous circumstance for Rambus. Eric explained the long-term perspective of Rambus technology last week, but that advantage won't win over this market until such time as processor speeds reach a point that DDR just can no longer compete. Currently that speed is in the high-end that Rambus dominates. The market is worried that DDR may come to dominate the middle and low-tiers for years to come. The result is a panic out of Rambus in droves by investors. At least that is the best I can decipher from what is happening. Doesn't matter that there is no real price advantage for DDR vs. RDRAM, even with DDR at depression era prices, it is perception that counts. And Intel can create a lot of perception if it should choose to go this route and really get behind it.
To conclude I am exhausted. This market, as I'm sure it has been for most
readers, has just been a one-way ticket ride downward. But I do honestly see an economic bottom. I am not the only one to see this. I've heard the same thing quietly uttered by select economists stating that "we are seeing the light at the end of the tunnel, and seeing it today." Not a false light, but the real thing. I think what the market is telling us is that it is still scared silly, and that although we may see the light, it is still a precarious light and who knows its intensity. But the light is there and I'm prepared to wait the next 6-12 months, through irrational pessimism, buying in opportune times, slowly, patiently and carefully.
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By Fred Hager
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