Net Stocks Soar as Investors Sour
On the Broader Technology Sector
By LISA BRANSTEN
THE WALL STREET JOURNAL INTERACTIVE EDITION
SAN FRANCISCO -- A new, harsher reality set in on the technology
sector Monday, but that sent Internet stocks soaring to record highs as
investors worried about weakening personal-computer and semiconductor
revenue searched for places to put their money.
On Monday, the technology-heavy Nasdaq Composite Index sputtered --
losing 28.33, or 1.6%, to 1725.16 -- in the wake of Compaq Computer's
warning late Friday that it would merely break even in the first quarter.
That revelation was jarring, given that analysts had expected the
personal-computer giant to post a profit of $500 million, or 35 cents a
share, according to First Call.
Compaq shares dropped 2 3/16, or 7.9%, to 25 7/16 on the New York
Stock Exchange. Meanwhile, Morgan Stanley's high-tech 35 index slipped
15.19, or 3%, to 499.97.
But Internet stocks, which often seem to defy traditional valuation
measures like price/earnings ratios, staged an across-the-board surge that
sent many companies' shares to all-time highs.
Amazon.com helped lead the rally, rising 6 3/4, 8.8%, to 83 1/2 -- an
all-time high -- on the Nasdaq Stock Market. These gains came despite
an article in the morning's New York Times noting the looming competition
from Barnes & Noble, Borders Group and Germany's Bertelsmann -- not
to mention an article in last week's Barron's about Amazon subtitled
"Internutty" that took shots at Amazon's sky-high valuation (see Barron's
article).
Other Internet retailers gained as well. Onsale was up 4 5/16 to 33, while
CDNow gained 3 1/2 to 26 1/8 and N2K rose 1 1/16 to 23 5/8, all on
Nasdaq.
Internet stocks are extremely volatile, and the sharp moves upward aren't
particularly notable in and of themselves. But what shocked analysts
Monday was that the gains came on top of big jumps seen recently after
President Clinton said he backed a Internet-tax moratorium. Just last
week, Amazon soared 22%, Onsale jumped 21%, and Web search
service Yahoo! gained 14%.
Bruce Lupatkin, an analyst at Hambrecht & Quist LLC, pointed to two
recent conferences -- one sponsored by his firm and another hosted by
BancAmerica Robertson Stephens & Co. -- as factors behind the stocks'
gains.
Many observers also said the warning from Compaq, fast on the heels of
profit-shortfall announcements by high-tech heavyweights Intel and
Motorola, encouraged investors to rotate funds out of the hardware
sector.
Tech Migration
"Technology money ... is migrating out of hardware stocks, and it looks
like [it's] hiding in baskets of Internet stocks," said Lise Buyer, an analyst
at Deutsche Morgan Grenfell.
Analysts said investors appear to be looking for sectors that are isolated
from the global economic slowdown and from uncertainties in PC pricing.
A common thread between the three warnings, they noted, is a slowdown
in global demand. A similar scare almost exactly a quarter back also sent
tech stocks swooning, but they staged a breathtaking recovery in the early
part of this year.
Scott Randall, who follows the semiconductor industry for SoundView
Financial Group Inc., believes that that run-up was unwarranted, especially
given the economic turmoil in Asia. There was too much speculation that
problems in the first quarter would be the worst the tech companies would
face, he added. Instead, he thinks there will be weakness in
semiconductors -- at least until all of the news about company's
performance through June is factored into the market.
Still, Deutsche Morgan Grenfell's Ms. Buyer called the broad-based
buying of Internet stocks "scary" because of the potential for investors to
get burned if weaker members of the group begin to have trouble.
Hardware Stocks Stalled?
So far, the technology sector has proven resilient in the face of bad news
-- as it has for months. Intel lost 10 7/8, or 13%, Thursday after its
warning, and the Nasdaq tumbled 2.7%, or 48 points, that day. On
Friday, however, the Nasdaq composite recouped almost all of its losses
-- rising 42 -- and even Intel managed to gain back 2 9/16. For its part,
Motorola, which made its warning after the market closed on Thursday,
tumbled 2 7/8 on Friday and then managed to recoup 1/16 Monday.
But Compaq's warning late Friday, which dragged on the broader tech
sector Monday, drove home the point to investors that hardware stocks
may be stalled for now.
One fundamental problem for the hardware companies is that there is less
of an incentive to upgrade to faster, more powerful machines -- precisely
at a time when low-margin sub-$1,000 PCs are the fastest growing PC
segment.
"Over the last 10 to 12 years, there have always been periods when the
software-application requirements have pulled the need for
higher-performance processors and PCs through the pipeline, or periods
where the processor performance has been significantly greater than what
the applications required," said SoundView's Mr. Randall. "We are clearly
in the latter stage today."
But amid the gloom in hardware stocks, Internet stocks, many of which
won't post their first profits until the next decade, soared to new heights.
Lycos rose 2 3/8 to 45 3/4, while search bellwether Yahoo rose 7 1/4, or
9%, to 87 13/16, both on Nasdaq. CMG Information Services, which
owns minority stakes in many Internet stocks, gained 4 5/8, or 7.9%, to
62 7/8, also on Nasdaq. All three stocks' closing prices were all-time
highs.
EarthLink Network and MindSpring Enterprises continued their incredible
run, which has lifted the stocks to successive all-time highs in the wake of
America Online's move last month to raise its monthly fee 10%. EarthLink
gained 5 3/8, 11%, to 55 3/8, while MindSpring added 6 1/4, or 11%, to
63 5/8 -- both records. AOL, meanwhile, gained 1 7/8 to 123 3/8 on the
New York Stock Exchange.
|
