Q Getting "Respect, WSJ>
June 4, 1999
Dow Jones Newswires
SMARTMONEY.COM: The New Darlings
Of Tech
By TIERNAN RAY
Smartmoney.com
NEW YORK -- When would the mad, unreasonable selling end? Cisco
Systems (CSCO), the company that virtually owns the networking
industry, was down at 105 on Wednesday and barely clawing its way
back to respectability late Thursday. Clearly, if investors would sell Cisco,
then they would sell virtually anything. They would bid poor Lucent
Technologies (LU) down to 59 7/16 as of Thursday afternoon, where,
trading at 50 times this year's expected fiscal earnings of $1.19 per share,
it had become simply expensive, a mere shadow of its former ridiculously
expensive self.
Well, obviously, the mad, unreasonable selling has abated as of Friday
morning, with Cisco up almost 3% at 111 7/8 and Lucent climbing to 61
1/8. In fact, there wasn't much at all in the way of a broad tech selloff this
week, not, at least, if you were hoping to spot great stocks being simply
thrown out the window, followed by their bankers. I'm aware some
readers may well be under water these days, having purchased Dell
Computer (DELL) at 55 back in late February. At 33 1/8, Dell trades at
45 times this year's expected earnings of 73 cents per share, not too
pricey. But what's also happened is that money has shifted to
cell-phone-technology maker Qualcomm (QCOM), bidding it up to an
astounding 103 as of Thursday, giving it a forward P/E of 51 based on
year-2000 expected earnings of $2.00 per share and a 313% return for
the past six months. All that based mostly on the fact that Qualcomm is
putting much o fits CDMA technology for wireless into the hands of
Ericsson (ERICY), which at a recent 28 9/16 is trading at only 38 times
this year's expected earnings of 74 cents per share. Now there's a stock to
think about buying.
No, I think we saw less than a broad selloff through Thursday, more like
some tactical bets being placed by investors, with money coming out of the
old industries, such as the PC business, and moving into communications
companies, where many fund managers will likely be piling their money in
increasing allotments in coming years. And why not? My friends at the
Dell'Oro Group, which tracks the networking industry, say money
continues to pour into equipment for so-called wide-area networking, the
pipes that connect businesses to one another. Data for the first quarter
shows sales of so-called access concentrators, a category that includes
cable modems, were up more 23%. There's continuing growth here
because the Internet is a multiyear project.
On the other hand, investors are taking a second look at the enormous
supply of Internet stocks. A year ago, you couldn't really make an index of
Internet stocks. Today, there are at least a hundred companies that matter.
But supply continues to grow dramatically, even as investors realize that
Amazon.com's (AMZN) projects are taking longer to bear fruit, as we
wrote in this space a few weeks back.
Meanwhile, the investors who really count - the ones who get to set their
own price - are still piling money into the market. Venture Finance, a
monthly newsletter put out by Technologic Partners in New York,
announced the other day that private investments by venture capitalists
continue to flow into high tech start-ups at a record clip. In the first quarter
of this year, private investors put an amazing $4 billion into 600 Silicon
Valley start-ups, which means they are easily on track to best last year's
total of $12.4 billion for 1,700 companies by the third quarter of this year,
as has happened in the past two years.
This money went into some of the so-called hot start-ups that will no doubt
soon go public, many of them communications companies, including
Network Alchemy, a Santa Cruz, Calif., company building private
networks for businesses, and ITXC, a Princeton, N.J.-based start-up that
provides settlement services to the telecom industry, specifically for
telephone calls made using the Internet.
The question is, are the venture capitalists ahead of the market, or, given
last week's awful showing for Barnesandnoble.com and the lackluster
trend in Net stocks this week, are these investors trailing the market,
pouring money into hopes of public offerings that are already over?
No, I think private investors realize that the M&A market in technology
will buy many of their good ideas, even if the public market won't. The
networking companies in the pipeline and the telecommunications-services
companies are part of the vast building project of the Internet, and that
means plenty of growth lies ahead.
The public market has picked up on this, and as a consequence, there's
too little selling, if anything, in some of the best names. Back in late
February SmartMoney magazine looked at eight tech stocks we're in love
with. Even then, the stocks were trading at unruly premiums, relative to
their historic P/E multiples. We set some target prices we thought they
might fall to, where they'd be a buy. PRI Automation (PRIA), a
chip-equipment company, has fallen below our target price of $27; it's
trading at 26 3/8 Friday morning. The others never came close, having
soared since we made our findings.
With the amount of premium left in the SmartMoney picks, and in gems
like Cisco, we could use a little more selling, a little panic. No, we're not
seeing massive dumping of techs, but we are seeing something else that's
an interesting trend. Unlike nine months ago, investors are not clinging to
their Internet stocks for dear life as the waters rise and as they fear the
market fundamentals may be coming unhinged. The Amazon's and
Yahoo!'s (YHOO) have lost much of their status as a security blanket for
the tech crowd.
Net stocks may well recoup some lost ground in the next couple of weeks
as investors start to focus on second-quarter profits. I personally think
Amazon and others will. And I think the public market will resuscitate
itself. First Call thinks the second quarter will be the best of the year, with
profits up 13%. Profits for the third and fourth quarter are cur rently
expected to be up 24% and 25%, respectively, but those estimates will
come down substantially as we move into the summer.
And then what? Christmas anticipation? A second-half bump from the PC
market as the Y2K disaster sparks spending on information technology?
There's no sign of it, yet. Trading at around 51 on Thursday, Intel (INTC)
may be worth a second look. Generally, though, it's going to be the
communications sector that has the strength going into the rest of this year.
Communications for the Internet, and perhaps in select areas of the
networking market, such as the fiber channel companies we recently
reported on. To the Lucents, the Ciscos and the Nortels (NT) is where
most of the smart money in tech will migrate over the rest of this year.
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