Thread: Analysts Get Bearish On Tech Stocks:
Top analysts grow gloomy on tech stocks
BY ADAM LASHINSKY
Mercury News Staff Writer
A handful of Wall Street's top analysts are pessimistic.
This news should frighten the legions of investors breathing a sigh of relief that some beaten-down tech blue-chips have re-gained their steep losses.
The fear, expressed repeatedly last week even as many tech sectors surged, is that savvy investors are beginning to realize that overall capital expenditures on technology have been decelerating since 1995. Whether the product is personal computers, semiconductors or software, when explosive growth slows technology stocks become a lot like other stocks. In other words, they grow at merely normal rates and are susceptible to macroeconomic trends.
Add to this inexorable march toward slower growth the near obsession with spending to avert year 2000, or Y2K, computer problems, and one comes up with a gloomy overall outlook for 1999.
''I think this is a framework you can use for looking at the entire technology sector,'' says Rick G. Sherlund, the influential software analyst for Goldman, Sachs & Co. in New York. ''All the companies I follow are vulnerable to a slowdown on the macroeconomic environment and Y2K issues. I'm seeing it all over. Deals seem to be much more difficult to close. That's the canary that tells you the air ain't right.''
Sherlund's sources alerted him that PeopleSoft Inc. (Nasdaq, PSFT) was making uncharacteristically desperate attempts to close sales of its software for big businesses at the end of the third quarter. As PeopleSoft and its competitors sell giant programs that are difficult to implement, they make easy targets for ''inwardly focused'' information-technology managers looking to cut budgets.
Given that Wall Street is the ultimate practitioner of group mentality, Sherlund sees precious little to like in coming months. Although it remains on Goldman's prized ''recommended list,'' Sherlund even is concerned about shares of Microsoft Corp. (Nasdaq, MSFT). Investors are willing to pay a premium of twice the company's growth rate because it is so reliable (a multiple equal to the growth rate is more typical), but that would change, says Sherlund, if the market gets crushed.
Another tech naysayer is Merrill Lynch & Co.'s Thomas P. Kurlak, who firmly believes semiconductor companies are being stymied by a slowdown in its end-market customers, electronics companies.
New York-based Kurlak is well known for this bearish position on Intel Corp. (Nasdaq, INTC), which faces price erosion like it's never seen before. He sees across-the-board woes for chips.
''We don't want to go out on a limb to say this is some sort of recovery,'' he says, adding that there's plenty of time to identify a bottom for tech stocks and still make gobs of money.
Picking on a company other than Intel, Kurlak points out that Texas Instruments Inc. (NYSE, TXN) last week reported that year-over-year sales for telecommunications-oriented digital signal processors, which now account for 58 percent of the company's revenues, were flat. ''That's their largest product line, and it's weak,'' he says.
''The chip industry always predicts the economy,'' says Kurlak. ''It's not likely '99 is going to be an up year for anything.''
For what it's worth, Kurlak publicly is high on just two stocks, PMC-Sierra Inc. (Nasdaq, PMCS) and Broadcom Corp. (Nasdaq, BRCM). The latter, despite being a volatile and richly priced stock at Friday's close of $75.50, will ''grow like crazy for the next three years'' because of demand for cable modems, which enables faster Internet connections.
''It's an Internet stock with earnings, which makes it cheap,'' he quips.
But even on the Internet, clearly the great hope of the tech sector, some see warning signs. Notably, the fear is gaining currency that a slowdown in advertising will dampen enthusiasm for Internet portal companies like Yahoo Inc. (Nasdaq, YHOO) and Excite (Nasdaq, XCIT).
Brian C. Oakes, the Lehman Brothers Inc. analyst who follows new and old media companies, believes '''99 is setting up to be the competitive year you don't want to go up against Microsoft, AOL, Disney and NBC. They realize they can just outlive'' the other, newer Internet companies.
Oakes sees disturbing similarities between the Internet sector of today and what happened to burgeoning online stocks like AOL in 1996.
''I had people who were 10 percent shareholders who didn't understand how (AOL) priced their services,'' says Oakes, recalling when AOL's stocks plunged from around $70 to $20, on a pre-split basis. Similarly today, hordes of investors don't know anything more about their Internet holdings than that the companies are into exciting products.
Not everyone is down on tech stocks.
Credit Suisse First Boston Corp.'s Michael Kwatinetz, who, like Sherlund and Kurlak, recently won coveted No. 1 analyst rankings in a poll of institutional investors, says fears of reduced capital spending and Y2K cutbacks are overblown.
''I'm directly positioned against the Y2K alarmists,'' says Kwatinetz, noting that shortly before the current tech-stock rally ''I think I was the only person on the Street telling people to buy a stock.''
Now everyone's seemingly buying tech stocks again. It may not last. |
