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Technology Stocks : Altera -- Ignore unavailable to you. Want to Upgrade?

To: Teri Skogerboe who wrote (1524)	1/27/1998 1:56:00 PM
From: Teri Skogerboe	Read Replies (1) \| Respond to of 2389

Just stumbled on this article from Forbes, 1.20.98 (mentions ALTR, XLNX and others) Q & A with Roger McNamee, 1.20.98 By Stephen S. Johnson Roger McNamee is a general partner and founder of Integral Capital Partners in Menlo Park, Calif. Established in 1991, Integral Capital, with over $600 million under management, invests in expansion-stage companies in the information and life science industries. McNamee holds a B.A. from Yale University and an M.B.A. from Dartmouth's Amos Tuck School of Business Administration. He is also a Chartered Financial Analyst. FDM: What can investors expect from tech stocks in 1998? RM: This year will be very volatile, and investors must be ready to go in and pick their stocks, but be prepared to suffer over the short term. I think 1998 is going to be a year to invest money in stocks that in two to three years will provide huge returns. But investors must ready for some near-fundamental risk. The two big trends--the maturing of the PC hardware sector and the Asian currency crisis--that began in mid-1997 will leave their mark on the industry. The next six months will be a challenge while this transition period plays out through June. Q: What do you mean by the maturing of the PC sector? At home, PC vendors--largely in response to the success of Dell Computer--initiated programs to optimize their supply chains again. Dell was the first to demonstrate that its total supply chain, from the day a part came in to the day it got paid for its finished product by the customer was about 12-14 days. A very short cycle. The next-closest was Compaq, whose turnaround took some weeks. This gave Dell two enormous advantages: It could be exceptionally responsive to price changes in components and technology, and use a lot less capital because it didn't have to support so much inventory. Compaq tightened up on its model and later HP [Hewlett-Packard] and others announced their own plans. This shift is having a big impact on the industry and how the component companies--memory, disk drives and monitors--now have to operate with the PC vendors. And what about Asia? As we all know, the semiconductor equipment stocks and a lot of component manufacturers got pummeled last year as a result of the Asian currency crisis. The way I like to ask the question to people who are bullish on these stocks--because some of them are cheap now--is, "How many steppers do you think the IMF is going to buy from Korea in 1998?" [Steppers are machines used to make silicon chips.] But keep in mind that the reason these countries are in trouble is not because they have too much consumption, but because they have a lot of political cronyism, which has led to manipulated currencies and [government] support of unprofitable businesses. If you get rid of that element, these economies are exceptionally productive. If you believe this is a short-term thing and assume Asia's troubles won't get any worse, there is a very positive three-year outlook because the purchasing power of these countries at the margin will rise from where it is today. What is the future of the Internet and Internet-based companies? I think we can now absolutely take the Internet as a given. With the penetration of networks and the interaction, in terms of people over E-mail, I think we can safely say this is no longer a fad. It is a real shift. But people haven't really figured out the business model yet. Only a few companies have shown that they have a good business model. Yahoo! demonstrated that it could be profitable, AOL showed the power of having a large number of paying subscribers and Microsoft proved that it could become a force. Its market share numbers were disappointing at year-end, but let's not kid ourselves, Microsoft made life miserable for Netscape all year. This is a 20-year opportunity for the Internet and we are only in year three. We haven't even scratched the surface. Look at the PC industry in 1980. If you had asked people to predict in year three of that industry what it would be like in 1997, most of them wouldn't have come within two standard deviations. Do you consider yourself a technology bull? I am exceptionally bullish on the fundamentals of the technology universe, even though I am uncertain about how events will play out after the middle of this year. Remember that 1997 was a bad year for technology. I have been investing in tech for 15 years and things were never uglier than last year in terms of relative performance. Also remember that from 1991 to 1995 or maybe 1996, people investing in technology had it pretty easy. There were periods when you really could throw darts at the board. Now I think I think it will be a couple of years before it gets like that again. Technology is an intensely Darwinian world. What happens in technology is that we see waves of innovation when a group of people simultaneously figure out a really viable economic model, like they did with PCs beginning in 1991. When that wave coincides with the front end of an economic cycle, it gets really powerful. Conversely, things get really negative when the two go down together as you are now seeing with the Asian currency crisis. When those people get the model right for online commerce and a measurable part of the economy begins to go online, that will be the next up cycle for technology. What stocks should investors keep an eye on this year? Investors will do better to buy the best stocks among the hundreds that got completely hammered over the last six months. As examples, look at network stock 3COM (COMS), or semiconductor stocks such as Xilinx (XLNX) and Altera Corp. (ALTR). The whole semiconductor industry was tarred by the Asian crisis, yet they are not all equally at risk from the problem. Companies like Xilinx and Altera didn't live up to Wall Street's expectations. There were issues with product cycles and supply chain optimization in the networking industry in 1997, but these companies will recover from that nonsense. Investors could also consider analog circuit maker Maxim Integrated Products (MXIM) and networking chip maker PMC-Sierra (PMCS). I also like software services company International Network Services (INSS) and MapInfo Corp. (MAPS) in the packaged software group. Remember there are a lot of really volatile situations in software. There is still a lot to be sorted out in this group, but opportunities will emerge later in the year. I think there are some values in the box business, too. For example, Sun Microsystems (SUNW) is a cheap stock. [Sun recently traded at $45.] Everybody is panicked that [Microsoft's] Windows NT will wipe Sun out. This is likely in the long term, but that's very unlikely over the short term. Sun is also a tremendous beneficiary from the growth of the Internet. I also like Dell Computer (DELL). Dell is a heck of company, but right now it's not as cheap as Sun. For both the semiconductor equipment and storage stocks, it's too early to buy. But later this year, the best ones will be KAL-Tencor (KLAC)and ASM Lithography (ASMLF) in the semiconductor group and Seagate Technology (SEG) and Komag (KMAG) in the storage sector. And Intel (INTC) could be a buy within the next 90 days. forbes.com