For Tech Stars, a Cut Is No Cure-All
The Fed's Apr. 18 rate cut gave the stock market, including tech stocks, a real boost. Many bargain-hunting investors have begun to pile back into shares of the beaten-down tech stars, figuring they will again lead the market.
So is the worst over for these former high-fliers? Not so fast. Over the long run, the price of tech stocks is much more closely connected with expectations for future growth than with rate cuts. If long-term tech demand is expected to grow at 15% to 20%, it stands to reason that stocks will enjoy higher prices than if expectations were for 10% growth.
Here's the irony: Many of today's tech stars may not benefit all that much from the next big boom in the tech sector. Historically, faster rates of tech growth are associated with rapid rates of innovation, which generally happens when a lot of new companies enter the industry. And history shows that when new companies come in, many existing companies get pushed aside, bought up, or simply left behind. To put it bluntly, a lot of tech's best-known names today will get washed away when the next innovation wave comes through.
Consider the top tech companies of a decade ago. Of 34 computer and software outfits in BusinessWeek's March, 1990, profit scoreboard, 16 have disappeared as independent companies. Many of these, including AST Research and Digital Equipment Corp., saw poor stock returns before being acquired. Even those survivors that did relatively well, such as Compaq Computer Corp. (CPQ ), fell far behind the real beneficiaries of the New Economy boom, such as Cisco Systems Inc. (CSCO ) and Dell Computer Corp. (DELL )
So for those tech investors who are holding the likes of Cisco and Dell, and patiently waiting for the tech rebound, beware: When the rebound finally arrives, it just may leave you sorely disappointed.
By Michael J. Mandel in New York