Timing The Tech Stock Recovery Investors Should Trust Themselves, Not The Analysts
Hal Plotkin, Special to SF Gate
Wednesday, April 4, 2001
Given the sharp decline in tech stock prices over the past few months, many of Wall Street’s best-known securities analysts are trying to coax wary investors back into the market.
Just a few days ago, for example, Goldman Sachs’ influential market guru Abby Joseph Cohen told CNBC-TV’s national audience that “valuations are attractive enough to put some new cash to work,” and that “investors should be happy going back into stocks.”
Not so fast.
You wouldn’t know it from such optimistic talk, but from where I sit in Silicon Valley, what’s happening to tech stocks looks more like the “Perfect Storm” than a buying opportunity. What’s worse, it could be quite a while before the squall blows through.
Nasty weather is now pummeling the tech sector on several critical fronts at exactly the same time.
The growth rate of sales of personal computers and related software applications has tailed off. The promised rapid rollout of reliable broadband Internet connections and services hasn’t materialized. First-generation business-to-consumer (B2C) firms have been largely vaporized. And supposedly more reliable business-to-business (B2B) commercial applications have run into some pretty significant implementation roadblocks.
Each of these problems will eventually work themselves out. But in my view, we’re talking years here, not months.
Tech stocks exploded in value during the 1990s as a result of what renowned stock trader Art Cashin, director of trading floor operations at PaineWebber, dubbed the “Goldilocks economy.” Like the porridge in the children’s fable, economic conditions during the past decade were “just right.”
First, we had the triumph of capitalism at the end of the Cold War, which led to an unprecedented infusion of new money into U.S. equity markets. Then a rapid-fire series of new must-own personal computer models came to market, each iteration of which made previous still-working models obsolete, while at the same time fueling skyrocketing growth in sales of related software applications. And the topper, of course, was the advent of the Web browser, which turned the once sleepy Internet into an engine of unprecedented economic growth.
We’re now seeing a significant, and potentially long-lasting, pause in each of these important areas.
Growth in sales of new personal computers over the next few years is expected to be about half of what it was during the best parts of the past two decades. The reason: Consumers don’t have to purchase new PCs to run the latest software or operating systems.
Getting consumers to throw out working personal computers was always the key driver behind the PC industry’s phenomenal growth. I don’t know about you, but over the past two decades I’ve discarded more than $12,000 worth of virtually new computing equipment, including systems that were powered by 8088, 286, 386, 486 and Pentium I microprocessors.
Like most consumers, I had no choice. It was usually difficult, if not impossible, to run the software I needed without the latest and fastest microprocessors.
But now, thanks to fierce competition between Intel and arch-rival Advanced Micro Devices, PC hardware has blown past the processing demands not only for current software, but also for the software coming down the pike.
Microsoft’s next PC operating system, called Windows XP, for example, is expected to work on most PCs purchased after 1998.
That doesn’t mean the food chain that supports the PC industry, which includes semiconductor manufacturing equipment-makers, the chipmakers themselves, disk drive firms and the like, will collapse. Just that the PC industry has grown into a more mature “replacement” rather than “new product” phase, making it more like today’s automobile industry, which has gotten very few investors excited in recent years.
Meanwhile, hopes for a rapid rollout of broadband Internet connections and related services, which helped fuel the stock market’s rapid rise, have now been dashed.
Download any full-length motion pictures lately?
Not likely, given what the experts call the “last mile” problem. While telco and cable firms have been bankrupting themselves in a mad scramble for market share, few if any of these companies have done much to bring reliable and affordable broadband connections to consumers.
I live in Palo Alto, for example, a place you’d think would be ahead of the curve when it comes to broadband Internet connections. We’re not. As has happened in many areas, our cable TV and cable modem service was recently taken over by AT&T. The cable modem service AT&T inherited from the system’s previous owners is so trouble-prone that residents, many of them telecommuters, report being offline for days, sometimes weeks, at a time.
Many of those looking for broadband relief from DSL service providers aren’t finding it there either, thanks to similar customer service and technical problems. And now that so many smaller DSL service providers are going out of business, there’s little hope that competitive forces will improve the situation anytime soon.
We’re hearing promises that broadband wireless technologies will take up the slack. But most broadband wireless Internet services remain line-of-sight, which means that if you can’t point your dish directly at the service provider’s dish, you’re flat out of luck. That is, if such services are even available in your neighborhood.
Absent a dependable broadband delivery system, there is little hope we’ll soon see those promised revolutionary new broadband services. That reality cuts the slats out from under more than a few online business plans, which explains the tanked online media stocks.
Likewise, we have the B2C and, to a lesser but still important extent, the B2B debacles.
It’s no secret that B2C, which involves selling consumers stuff over the Internet, has been mostly a bust.
The first companies out of the e-commerce gate have been hammered by constantly escalating expenses associated with the purchase of still-maturing software and related infrastructure while at the same time facing relentless pressures to keep their prices low because competing online merchants are always just a few clicks away.
What’s more, the best online shopping technology isn’t even here yet. Eventually, for example, we should get access to personalized shopping agents (called bots, short for robots) that can ask us what we need, keep track of our preferences, and even negotiate major online purchases, not just books and CDs, with far less effort than is now required.
But such easy-to-use systems are still years off. As Dataquest’s former lead Internet analyst Blaine Mathieu puts it, “the death of B2C has been greatly exaggerated. The truth is it hasn’t even been born yet.”
Unfortunately, that birth is going to require a much longer gestation period than many had hoped because as Webvan’s recent experience proves, changing people’s shopping habits is no simple task.
Ditto with B2B, which was supposed to rapidly revolutionize business by more efficiently linking communities of companies with networks of suppliers. It turns out, however, that each industry has its own particular issues and relationships that make automating supply chains problematic at best.
The biggest hope was that a new scripting language that operates on top of HTML, called XML, would help businesses get their computers talking to each other without needing any human intervention. But technical issues, including disputes over standards for XML, have likewise kept the most ambitious of those plans on the drawing table.
In the health care industry, for example, the original projection was that firms such as the Web site Healtheon would help eliminate up to $1 billion or more of expenses in the supply chain each year. The idea was that Internet applications such as online marketplaces would create more competition among the suppliers of costly, specialized medical supplies, equipment and services.
Unfortunately, it turns out that many parts of the health care system don’t lend themselves to such cost-cutting measures, especially in areas where just one or a handful of suppliers control the rights to sell high-cost diagnostic products or medications.
As a result, throwing hardware and software at that problem has done little so far to contain health care-related costs, which continue their stubborn rise.
The bottom line is that most Wall Street analysts will keep on telling investors to buy tech stocks, in part because the arms of the securities firms they work for usually make most of their money selling financial services to companies seeking to sell stock. That explains the paucity of “sell” recommendations, which amounted to less than 1 percent of all analyst recommendations over the past year, a period when the Nasdaq composite index dropped by more than 60 percent.
So, when it comes to stocks, trust yourself instead of the securities analysts. The next time you find yourself rushing out to buy a new computer because you can’t run the latest software, or find yourself using broadband Internet services in a commercially significant way, it might be time to load up on the stocks of the tech firms pocketing your hard-earned cash.
But don’t hold your breath. You could be in for a pretty long wait.
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