Technology Stocks' Worst May Be Past,
Experts Say
By LAWRENCE M. FISHER
nvestors seized on some unexpected good news Friday from Intel,
Oracle and National Semiconductor to drive technology shares
higher.
Upside surprises have been few and far between in recent months, so
there is a strong incentive among prospective stock buyers to extrapolate
a recovery in technology from these three data points. And indeed, some
analysts said that so many companies had either warned beforehand of
poor results or had come in below estimates in the quarters ending in
March and June that a sizable number would now beat Wall Street's
diminished expectations for September and December. Whether that
kind of performance qualifies as a recovery is still open to discussion.
Look at Intel, which said Friday that its third-quarter sales would be 8 to
10 percent higher than the $5.9 billion reported in the second quarter,
rather than flat, as it had suggested earlier. While 10 percent sequential
revenue growth is enormous, it is only in comparison to the weak June
quarter, which showed no revenue growth over the period a year earlier
and a 29 percent drop in earnings.
Similarly, National Semiconductor said revenue would be up over earlier
forecasts because of strong August orders, but it said orders were still
down 30 percent, year over year.
For its part, Oracle announced per-share earnings on Thursday that were
several cents above analysts' estimates, thanks primarily to
stronger-than-expected license revenue from its traditional data base
business. But in applications, where Oracle has placed its hopes for
growth, revenue was flat, and the company still lags far behind rivals like
Peoplesoft and SAP of Germany. Oracle remains the dominant data base
company, but that market is widely regarded as mature.
Nevertheless, many analysts are ready to call a bottom. The Philadelphia
Stock Exchange semiconductor index, which reached a peak late in
April, nearly three months earlier than the broader technology sector as
reflected by the Nasdaq composite index, may also turn out to be an
early indicator of a market turnaround. The semiconductor index was up
8.70, to 211.52, on Friday and has now gained 11 percent from its
52-week low on Sept. 1 of 190.04.
"The PC inventory correction is over and PC demand is seasonally higher
in the second half of the year," said Mark Edelstone, an analyst with
Morgan Stanley Dean Witter. He noted that the pickup in National
Semiconductor's orders was primarily in the company's personal
computer-based product lines, and that Intel, of course, was uniquely
positioned to benefit from stronger PC sales.
"Intel is the first company to get healthy," he said. "The rest of the
industry still lags."
Edelstone said he did not expect many positive surprises in the
semiconductor business in the third quarter, but he does in the fourth.
"We will see a contraction of the negative surprises," he said. "In the
second quarter, more than 20 semiconductor companies preannounced
negatives; 55 percent were below estimates. I think we can cut that
number in half."
Michael Murphy, editor of the California Technology Stock Letter, takes
an even more bullish view. "What's going to happen going forward is
what we're seeing today," Murphy said on Friday. After scaling back
earnings estimates in the first half of the year, "in the September and
December quarters, technology companies are going to beat estimates
pretty generally because we're in the right part of the product cycle," he
said, adding, "At the same time, the Asian crisis is finally biting in the old
economy."
Technology companies could flourish even as blue-chip companies head
into recession because they are typically driven by product cycles rather
than economic cycles. With the Microsoft Corp.'s release of Windows
98 in May, and its anticipated release of Windows NT 5.0 next year,
more corporations are likely to upgrade their PC's, and that will ripple
through the industry, Murphy said, giving a lift to makers of
semiconductors, disk drives and software.
John Rossi, a managing director with BancAmerica Robertson Stephens,
said technology stocks were the first to fall as a result of the Asian crisis
but might also be the first to recover.
"The blue-chip companies took longer to feel the effects of Asia, but next
year a lot of these companies will do the bulk of their spending to fix year
2000 problems," Rossi said. "Maybe not a lot will happen in the first half,
but the second half of the year should be very strong, thanks to Windows
NT and 13th-hour spending on year 2000."
Roger McNamee, a principal in Integral Capital Partners, which
specializes in technology stocks, agrees that technology companies could
prosper, even in an economic downturn, but he takes a more cautious
view. Personal computer technology, he said, "is the likely place people
will do triage in terms of capital spending."
"Every company sees technology as their way out of this economy,"
McNamee added.
But technology producers will not all benefit equally, McNamee said.
The current market is good for a company like Dell Computer, which is
selling ever-greater percentages of higher-end servers, and challenging
for Hewlett-Packard, selling more and more low-priced consumer PC's.
"What Intel is telling you is, 'Hey, the world didn't end,"' he said. "But as
much as everyone would like to draw broad conclusions, I don't think it's
appropriate." |
