Techs Still Crazy After All These Years
By Pierre Belec
Sunday March 24, 9:05 am Eastern Time
NEW YORK, (Reuters) - Two years after the New Economy punched out the lights for a lot of people and sent trillions of dollars up in smoke, investors are still convinced technology and telecommunications stocks are the great wealth-spinners they once were.
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The Nasdaq composite index, which comprises 70 percent technology and telecom stocks, has roared back by 40 percent from the three-year low of 1,460 set after the Sept. 11 attacks. Just two years ago, in March 2000, the Nasdaq hit a record high of 5,048. The head-spinning drop of nearly 70 percent was the biggest hammering suffered by any U.S. stock index since the 90 percent market crash during the Great Depression.
Yet investors are still betting the ranch on the New Economy stocks and have again priced tech and telecom stocks out of this world, even though many companies are operating in a recession-like environment for the first time in their short history.
Fair to say, investors continue to ignore the message that these stocks can be dangerous for people who invest for their retirement years.
Bring on the videotape.
Intel's market capitalization has exploded to $221 billion, regardless of the fact that worldwide sales of semiconductors amount to only $139 billion. While Intel's sales inched up just 1 percent from 1998 to 2000, its stock now trades at 8.3 times revenues.
Another example of irrational pricing is Applied Materials, which has a market cap of $41 billion even as global sales of semiconductor-making equipment amount to only $28 billion.
There's more. While Microsoft's revenues climbed 36 percent, or at a rate of 13 percent annually over the last 2 -1/2 years, the earnings of the giant software maker have shrunk. But Microsoft's stock still trades at a whopping 13 times revenues and 57 times earnings.
[Harry: This based on shipments this year? What were the peak shipments?]
The incredible valuations show that investors still believe technology companies will continue to have spectacular growth ahead of them, says Alan Newman, editor of CrossCurrents, a financial letter.
``Clearly, the computer industry has completed its growth phase,'' says Newman. ``Microsoft's business is likely now beyond its best period of growth, yet (its stock) trades like it had the potential for growth it had a decade ago.''
LIGHT AT END OF TUNNEL
While 30 percent fewer companies have issued earnings warnings in the current first-quarter compared with a year ago, tech/telecom companies continue to sing the blues. For many, the light they saw at the end of the tunnel earlier this year turned out to be a speeding locomotive.
What's happening is the New Economy sector is being left behind as the rest of the economy appears to be bouncing back from one of the shortest recessions in history.
``What has fooled some folks is the belief that the recovery is supposed to be massive and simultaneous for all companies,'' says Bill Valentine, president of Valentine Ventures LLC., ''Doesn't happen that way and it doesn't have to.''
Wall Street houses are slowly lowering their forecasts for some of the trend-setting names, which could eventually bring a knock-on effect to the rest of the sector.
J.P. Morgan recently warned the results of the world's largest chipmaker, Intel, won't be as strong as expected in the second quarter and Salomon Smith Barney said personal-computer shipments in the second quarter will drop from a year earlier due to cutbacks in corporate spending on computers.
FATAL ATTRACTION
The challenge for investors is to control their bullishness because the technology and telecom businesses cannot be expected to deliver 1990s type of growth.
Overbuilding and overexpansion were the ``in'' things during the suffocating expansion in fiber optics. Millions of miles of cable were laid, but less than 3 percent are now operating. The rest may never be used. The reason: the future is in hand-held, wireless technology.
[Harry: This ignores the fact that wireless is band limited. You can only get so much data through the ether so fast.
It's no mystery that spending on technology is on hold, even as the manufacturing recession shows some signs of having bottomed out. The February report on total industrial production, for example, rose 4.1 percent year-over-year, but the technology sector was still down nearly 10 percent.
Among big names, Lucent raised Wall Street's expectations early this year when it predicted a business recovery, but the company has since made a U-turn and warned that its business climate is not as rosy as first thought. Lucent doesn't see better days until 2003 and beyond.
Another struggling company is Canadian telecommunications parts maker Nortel Networks, which had its debt rating downgraded to just above junk status. Moody's Investors Service, the credit rating agency, warned the collapse of network global carriers will scar Nortel more seriously than expected. A few months ago, Nortel told its stockholders the outlook was improving after last year's heart-stopping drop in earnings.
Then there is Oracle, which threw up its hands this month and said spending on software remains soft. It sees no signs of improvement until at least the fourth quarter this year.
LATEST BELLS AND WHISTLES
What's happening is that technology is not selling at the same brisk pace as in the 1990s when businesses loaded up on the latest bells and whistles, bringing 20 percent-plus gains in revenues. Now, the most optimistic people predict a growth rate of less than 10 percent.
PriceWaterhouseCoopers confirmed the extent of the business spending drought. In a survey, nearly half of the 405 fastest growing U.S. companies said they are scaling back on buying technology that will make their businesses more productive.
Most cited the uncertain economy for pulling back on spending. Goldman Sachs in its own sampling of 100 of the biggest information-technology companies found that spending will be down this year as budgets are further tightened and long-term projects are delayed.
Many of the tech companies' customers are also holding out for new ``killer'' applications that will justify taking the spending plunge. With businesses insisting on spending only on technology that will provide instant profits, tech makers are adopting a short-term investment horizon, which may cause the industry's slowdown to be deeper and more protracted.
Worth remembering is that the introduction of new and exciting technology has been the driving force behind tech companies' growth. Can the industry recover any time soon if it strips itself of the ability to innovate?.
For the week, the Dow index fell 1.7 percent to 10,428, the S&P 500 was down 1.5 percent at 1,149, and the Nasdaq slid 0.9 percent to 1,851. |
