Here at the 30th Annual JP Morgan H&Q Technology Conference, the gloom was thicker than the carpets at the Westin St. Francis Hotel -- even after Cisco's report.
No More Glory Days For Big Tech
By HOWARD R. GOLD
SAN FRANCISCO -- OK, so the Dow Jones Industrial Average skyrocketed 305 points on Wednesday, and the Nasdaq Composite Index soared 7.8% after Cisco Systems reported earnings that beat Wall Street's estimates by two cents a share. And revenues, the networking giant indicated, were up a whopping two percent.
That "home run" quarter, in chief executive officer John Chambers' phrase, was enough to send the bulls charging and the shorts covering (although both the Dow and the Nasdaq gave back some ground Thursday).
Finally, the technology titans of yesteryear were back big time: Cisco up 24%, and both Microsoft and Intel 11% higher. Even Sun Microsystems and much-maligned Oracle partied like it was 1999.
But it isn't. Here at the 30th Annual JP Morgan H&Q Technology Conference, the gloom was thicker than the carpets at the Westin St. Francis Hotel -- even after Cisco's report. Corporate executives were almost uniformly cautious, and I couldn't find a single money manager who'd admit to being bullish on technology.
The reason: Despite their recent correction, many of these stocks are still trading at high altitudes, even if the companies have missed earnings targets or complained about lack of "visibility."
What a contrast to the late 1990s, when money managers and private investors jostled each other in the hotel's hallways to get in on the latest, newly public technology and Internet sensations. This year, there was room enough for the Stanley Cup playoffs, and you could hold a wedding in the pressroom. Attendance was the lowest since 1994.
Aha, a lot of contrarians might say, surely fear is reaching an extreme, just as greed did in 2000. Surely, we're closer to the bottom than to the top, and it's too late to sell.
With so many tech stocks 60%, 70%, 80% off their all-time highs, it may be too late to sell. But that doesn't mean it's time to buy.
Why? Because business is lousy, and will likely remain so for some time.
PC sales are weak, Nokia keeps cutting its estimates for sales of wireless phones and battered telecommunications equipment makers haven't dared stick their heads out of the rubble. One speaker at Wednesday's Views from the Buy Side panel called a revival of that devastated sector "an '04 phenomenon." Didn't they tell us last year it was "an '02 phenomenon"?
"Is it getting worse? Not necessarily. Is it getting better? Not necessarily," Ed Zander, Sun Microsystems' outgoing president and chief operating officer, told attendees. He says that corporate chief information officers he talks to are "trying to do more with less."
Bill Gates echoed those comments on ABC's Good Morning America Thursday, telling Diane Sawyer that he didn't expect to see companies start spending on technology until they're profitable again.
Even then, don't look for them to open their corporate treasuries for Sun and Microsoft. Companies coming out of recessions keep a tight rein on the purse strings. They're also digesting some huge technology purchases they made a couple of years ago.
More importantly, there's no compelling reason to upgrade now. Unlike the PC revolution of the 1980s, networking in the early 1990s and the Internet a few years later, there's no "new paradigm" companies just have to adopt to. (For consumers, however, Apple Computer may be on to something with its focus on the "digital hub." See Weekday Trader Extra, "For Apple, No News Is Good News," May 6.)
It all adds up to slower -- maybe a lot slower -- growth in both revenues and earnings for the tech giants. Will Cisco and Microsoft now grow their earnings by, say, 10%-15% a year, as some analysts suggest, versus the 20%-plus annual clip investors took for granted a couple of years back?
If so, their multiples certainly don't reflect it. Cisco now sells at 44 times this fiscal year's consensus earnings estimates, Microsoft at 29 times and Sun at 38x fiscal 2003 estimated earnings.
If these companies' long-term annual earnings growth is closer to 10%-15% than to 25%, then Cisco would be changing hands at 3.5 times projected growth, Microsoft at 2.5 times and Sun at three times. Sounds pretty pricey to me.
What happened? I think the tech titans just grew up too fast. Force-fed during the incredible boom of the mid- to late 1990s, these companies went through their childhood, adolescence and young adulthood at accelerated speed. Now they're mature -- and as everyone knows, mature companies grow more slowly.
Still, attending some of the presentations here, I couldn't help but be impressed at how focused these companies still are on their businesses, how many of them are actually boosting research and development spending, which will eventually produce great technology to help us do our jobs and live our lives more productively.
Nonetheless, as venture capitalist Rick Kimball of Technology Crossover Ventures said at Wednesday's buy-side panel: "There's a lot of great technology out there, but if customers don't buy it, it doesn't matter."
Which is why I have two words for people who bought Sun or Cisco at much higher prices and are still waiting for Big Tech to return to its former glory: Dream on. |
