Tech Stocks Has the boom gone bust?
Hal Plotkin, Special to SF Gate
Wednesday, June 9, 1999
So, which way do you think tech stocks are heading?
It’s one of the questions I’m asked most frequently. The topic is particularly hot right now, as many formerly high-flying Internet stocks are taking a group tumble. As this is written, Amazon.com, for example, is down 53 percent from the stratospheric $221 per share it hit just two months ago. Lots of Amazon’s fellow dots are following suit.
The recent dot-com downdraft is not the beginning of the end, but it does look like the end of the beginning. In the future, tech investors will need to be far more selective when it comes to filling out their portfolios. Even so, there are still fortunes to be made investing in technology stocks. Here’s why:
The world remains a largely untapped market for the products produced by technology companies. It’s an easy fact to overlook here in the San Francisco Bay Area where high school kids regularly pack pagers and cell phones.
Travel a bit outside of technology hotspots like ours, though, and you’ll find a world where millions of people still don’t have easy access to even such rudimentary technologies as telephones, let alone personal computers.
World markets are hungry for products produced by technology companies. You get a sense of that traveling through remote villages in places like Africa and Asia. There, amidst the Quonset huts, you also see satellite dishes and the flickering lights of color TVs powered by the ever-present, noisy, smelly diesel generators.
The global market for technology products is nowhere close to being saturated. And, as the rest of the world struggles to catch up with the Western techno-Joneses, technology companies keep raising the bar, introducing new must-have products and technology-driven conveniences.
Wages, needed to purchase technology products, are also rising steadily, although unevenly, around the world. In India, for example, where the world’s largest growing middle class is found, the economy has been swelling at an annual rate of about 8 percent.
Coupled with growth elsewhere, that translates into hundreds of millions of new tech consumers who are now, or soon will be, looking to buy their first computers, digital CD players, and color printers. Not to mention the hundreds of millions of us who already regularly upgrade our tech toys.
That doesn’t mean all tech stocks will benefit equally from the still-rising tide of new technology consumers. There will continue to be individual winners and losers.
The same thing happened back when the personal computer revolution first hit; there were some early winners, such as Apple, IBM and Compaq. But there were also some conspicuous losers, like Osbourne, Kaypro and Leading Edge. Often, it was just one single misstep, one bad licensing deal, or one screw-up on the manufacturing side, that doomed one PC company while others went happily sailing along.
We’re beginning to see the same dynamic re-emerge in tech stock markets, and particularly in the Internet sector. The bloom is beginning to come off the Internet rose as more long-standing yardsticks of business performance are starting to reassert themselves. Does the company have any profits? Does it have a business plan that will stand up to heightened competition? Does the company enjoy any strategic competitive advantages?
In the months ahead, news reports on tech stocks, and particularly on Internet stocks, will focus more and more on these types of issues, and less on the sizzle of being the first company in a given horizontal market to go online. For Internet companies, that means blue sky projections will soon be replaced by the harsh, onrushing headlights of reality.
A lot of Internet companies won’t make it. Some will. But how can you tell, right now, which ones will be the winners?
Giving advice on that subject has become an industry in itself. There are some, like famed tech stock picker Michael Murphy, who say they have developed a formula that leads to wise long-term tech stock picks. There are others, such as the folks at Tiger Investments, who claim they’ve one-upped competitors by figuring out how to make better short-term picks, buying and selling tech stocks rapidly, to get the most out of sudden market moves.
Both of these strategies probably have some merit. During any given time period, either of them, or some other stock-picking magic, might do the trick quite nicely. But then again, as they say, even a broken clock is right twice a day.
The weakness in formulaic approaches to tech stock picking is they frequently overlooks things that aren’t easily measured. In the end, it is often those factors that most decisively influence overall stock market conditions.
There are at least two such factors that could impede the steady growth, and heightened competition, that should otherwise characterize tech markets in the years immediately ahead.
The first is a resumption of the Cold War, brought on, perhaps, by current fears the Chinese may have stolen enough nuclear secrets to make our rubble bounce as high as their rubble would bounce after a nuclear war. The last Cold War was devastating for our national and international economy. Huge amounts of resources, both people and money, were diverted from building the private sector.
When Jesse Jackson famously asked crowds during his 1988 run for president “How many of you own a Japanese or Korean-made VCR?” nearly all the hands shot up. Then he’d ask, “Now, how many of you own a B-1 bomber?” Jackson’s point was that workers in the United States should be making products that consumers here, and elsewhere, want to buy.
Thanks to the end of the Cold War, more of us are now doing exactly that. A renewed Cold War could turn the clock back to the days when nearly every technology talent in Silicon Valley was working on government contracts making items most of them could not even legally describe in public, let alone sell.
The other thing to watch for is what might happen when existing industrial and media powers finally come to understand how the Internet is rocking their world. When that occurs, it’s anyone’s guess what happens to the current federal moratorium that protects online companies from paying newly imposed taxes. The leaders of the Old Economy yawned last year when the Internet tax moratorium was put in place, seemingly seeing the Internet as little more than some kind of new-fangled game of global pong.
These old-line industrial powerhouses may not be so kind in the years ahead now that at least some online companies are getting a jump on them. One of the hallmarks of modern capitalism is that if you can’t out-run your competitors you can often, with the help of compliant, contribution-hungry legislators, trip them up.
We can hope, of course, that the leaders of well-entrenched corporations, many of whom are only now coming online in meaningful ways, might not want to jeopardize their own digital ambitions by taxing the Internet too heavily. That is, as long as these slow-moving behemoths don’t conclude they can’t win the game unless they change the rules.
But if we do avoid the pitfalls of a renewed Cold War or unfair government interference, the future looks much brighter for tech markets than the recent tech stock slump would indicate. Even so, I’m not convinced anyone can really say, for sure, exactly which of the online companies will thrive, or even survive.
Instead, knowing what I know about the vagaries of technology companies, I favor what might be called the Levi Strauss approach to tech stock picking. Strauss, you’ll recall, made his family’s lasting fortune during the Gold Rush by selling blue jeans to the (original) 49ers. He had the wisdom to realize that the overall gold-based economy was burgeoning, and the genius to understand that the odds were very much against any one person, including himself, actually striking it rich by finding gold. So while others looked for gold, Strauss sold them what they needed to continue digging.
The same thing is happening today in tech markets. Only it is not the blue jeans makers who are positioned to prosper. It’s the companies who make the technologies all the other technology companies need to keep panning for cybergold.
And which companies are those? They are the firms at the top of the technology food chain, such as companies that make semiconductor manufacturing equipment, computer chip manufacturers, companies that sell specialized software to online vendors, and networking equipment makers. For companies in those markets, it doesn’t matter if Barnes and Noble beats Amazon.com, or if Amazon.com cleans Barnes and Noble’s clock. In a war of attrition, which the Internet is rapidly beginning to resemble, you want to be the person selling munitions.
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