Dell, Lucent, Qwest: A Tale of
Three Tech Stocks
By Jim Seymour
Special to TheStreet.com
2/19/99 12:33 PM ET
Three of my favorite tech stocks are finishing a messy week after
painful slides. Dell (DELL:Nasdaq), Lucent (LU:NYSE) and Qwest
(QWST:Nasdaq) all bounced around in this truncated week and are
down 12% to 23% over the past month or so.
This sloppy week, featuring three confusing days in which the Nasdaq
had slipped about a hundred points through Thursday's 2260 close,
has had me thinking about why each stock went through those slides,
and what those drops can teach me about what's going on in tech right
now.
Clearly, substantial if inevitably transient changes are under way in
techs. For one thing, the bloom is off e-commerce for now. Just ask
Amazon (AMZN:Nasdaq) holders, who've watched the stock price fall
from Jan. 8, when it briefly touched 199 and change, to yesterday's
painful 89 1/2, down another 4. And Dell, a primary source of
leadership among techs, is off almost a quarter over just the past two
weeks.
I think these three stocks represent three different cases. Certainly all
were influenced by the tech market's general malaise over the past
few weeks, and certainly there were interactions: For example, Dell's
and Microsoft's (MSFT:Nasdaq) sagging prices brought down the
whole tech sector. But this wasn't just a case of a falling tide grounding
all boats equally.
Dell
Dell closed yesterday at 83, up 1 1/2 from Wednesday, but a long and
painful way down from its 108 5/8 closing high Feb. 2. Dell's quarterly
earnings report was the main event in the market over the past week,
leading to choppy trading before it was released Tuesday afternoon
and a steady slide since.
Part of that slippage was well deserved, as Dell forfeited some of the
substantial share-price premium it has enjoyed over its peers -- a
premium based on superior execution. Dell's misreading of the rate of
decline in component prices during the fourth quarter, plus other
management bobbles, meant that the company hit its numbers but
saw revenue in the fourth quarter rise just 38% -- as opposed to its
56% average over the previous eight quarters.
Few other companies would take a hit when reporting 38% growth, but
Dell's history has led to extraordinary expectations. Miss 'em and you
pay big time.
Dell's quarter may also be a warning to pending slowdowns in PC
hardware sales, as companies throttle back information-technology
capital spending to divert funds to Y2K remediation efforts. For
example, Toshiba, the big dog in notebook PCs for business, just
announced that it expects 1999 PC sales to come in around 2% below
earlier estimates.
Just between us, I'm also a little worried about Dell's comments that
it's considering entering the sub-$1,000 PC market in an effort to
generate revenue. Revenue, yes, but profits, no, I fear. That slice of the
PC market is a deadly one: The old line about losing money on every
sale but making it up on volume comes to mind. Sure, with falling
prices for entry-level CPUs such as Intel's (INTC:Nasdaq) Celeron
and AMD's (AMD:NYSE) K6-2 and K6-3, and the continuing free fall
in disk-drive prices, it may be possible for Dell to assemble and sell
"subzero" PCs with a little profit in them. But very little: Those lower
component prices are available to Dell's competitors, too.
Moreover, Dell has always emphasized a relatively high average
selling price of its machines as key to its business model. Amazingly,
Dell's been able to keep its average selling price over $2,000, which
has assured high profits in a business getting more commoditized
every day.
Jumping into the subzero market would inevitably reduce Dell's
average selling price sharply, hurting profitability. Michael, I hope you
don't do it. (I should be clear that Dell people say they're only thinking
about this and are not yet committed to entering the sub-$1,000
market.)
So what happened here? Put simply, Dell screwed up and got what it
deserved. No mystery there. Lesson: Run up investors' and analysts'
expectations through great performance over time, and when you stub
your toe even a little, you get whacked. Happened with Dell's last
quarterly earnings report, too, back in November.
I'm still a Dell bull, medium- to long-term, but remember my warning
here Jan. 8, when I said I expected Dell to be a first-half stock in 1999.
That nasty Y2K cloud may depress operating results until the second
quarter of 2000.
Lucent
Lucent, which I am long, closed Thursday up 4 3/4 at 101, but that's a
fair distance from its Jan. 6 closing peak of 117 3/16. Viewed
logically, Lucent's sag makes less sense than any of these stocks'
moves.
Lucent has enjoyed a run of good news lately. Its MultiService Module
-- the latest iteration of its 5ESS AnyMedia Switch, which allows
Internet service providers to move traffic off the public switched
telephone network -- has been gaining even wider acceptance. New
deals with customers such as insurance giant AIG (AIG:NYSE) look
good. Lucent's participation in networking pioneer Ralph Ungermann's
FVC.COM video-networking coalition could be a huge source of
revenue, and San Antonio's announcement two weeks ago of plans to
move ahead on its "Smart City" distance-learning initiative, based on
FVC.COM products, will provide a nice demonstration of Lucent's
capabilities.
Finally, Lucent's upcoming 2-for-1 split, with a record date of March 5,
should goose the share price a little, too.
What happened? I think Lucent's drop was a classic case of a big
stock wobbling right along with market wobbles. Lesson: Even giants
-- maybe especially giants -- can't escape the moves we've seen in the
market over the past couple of weeks.
I'm still a fan of Lucent. If you follow any of the conventional
value-investing rules, such as "buy on any 15% drop from the 52-week
high," this looks like a time to buy into, or buy more, Lucent. And if, like
Han Solo, you "make it up as you go along" -- and, also like Han, can
hold on tight during the turbulence -- this also looks like a smart time to
take some Lucent.
Qwest
Qwest, which I am famously long, has been sliding since its Feb. 3
high of 64; Thursday it closed at 51 5/8. More than one TSC reader
has written in the past couple of days to ask if I'm still as high on Qwest
as I was when I first wrote about it in December.
Short answer: High as ever.
Like Lucent, Quest has gotten a lot of good news lately. It completed
its acquisitions of European ISPs XlinkGmbH and EUnet. It
strengthened its joint venture with Dutch telecom player KPN to build
and operate a 9,100-mile Europewide IP-based fiber pipe. It actually
opened for business the first of six planned KPNQwest "EuroRing"
fiber loops on that pipe, and it continues to enter smart alliances, such
as its deal two weeks ago with TRW (TRW:NYSE) to expand the
Treasury's $1 billion Treasury Communications System.
I count Qwest's slide over the past week as a perfect example of the
innate volatility of tech stocks. We buy their big gains at the price of
big moves downward when the market gets shaky, when competitors
make bold moves, when ... the planets align in odd ways.
On one level, the same market dynamics that pushed the relatively
huge Lucent -- with a $133 billion market cap, Lucent is almost eight
times the size of $17 billion Qwest -- apparently also pushed Qwest.
But in practice, I think the real answer is that stocks like Qwest are
destined to ratchet up and down -- but, we hope, stay on an upward
trend line! -- with substantially more volatility than a Lucent, or AT&T
(T:NYSE), or any other big company.
Three good lessons: Mess up and you pay up. Even the big ones can't
escape market swings. And tech stocks will always be more volatile
than the market as a whole. Call it Investing 101.
A number of readers have written in the past few days to ask where
I've been, why they've seen fewer of my columns here on
TheStreet.com in the past couple of weeks than before. Rest easy: I'm
not going anywhere.
A week ago, my wife took a terrible fall on a steep hiking trail near our
home and broke both ankles. This is a particularly nasty injury, not
least because you're virtually immobilized: Without a "good" leg to
swing along on, you find even crutches are useless. So we've changed
our schedules so I can help take care of her. She's doing better now,
awaiting an operation next week that will screw the bones back
together, and I'm back in the groove on TSC columns. |
