Online Extra: Q&A: Pip Coburn, Tech Bear
When it comes to tech, Pip Coburn, global technology strategist for UBS Warburg, is feeling bearish, not just for 2001 but for 2002 as well. BusinessWeek Online Correspondent Margaret Popper spoke with him about the technology trends that will affect the investing picture over the next five years. He sees a return to growth but not robustly until at least 2003 or 2004. Here are edited excerpts of their conversation (a longer, streaming audio version is also available):
Q: What's your outlook for tech?
A: My outlook is somewhat negative. Next year we'll have a recovery, somewhat induced by the Fed. But most of the major trends, the revolutions in technology, aren't going to really hit for two, three, four, or even five years. Next year, while we might have this nice recovery, the odds of it being a big year in tech where a lot of new revolutions actually hit and generate large amounts of revenue are extremely low. We have to be a little more patient than that.
Q: What are these revolutionary technologies?
A: There are probably 10 revolutions that I think are very meaningful. I'll give you a few. In wireless, the move from voice to voice plus data. In PCs, there's a move toward devices and away from desktops. There's a move from narrowband to broadband in terms of access, whether in the workplace, or, more importantly, in the home.
There's a move from so-called circuit-switching to packet-switching. There is a move toward new storage architectures. The evolution in equipment from semiconductor process toward systems-on-a-chip, which is still really early on. Or taking more of the content and putting it in an ever-smaller spot and linking it together on one chip. A big change that looks like it's going to be coming is the move in optics from long-haul to the metropolitan space.
With these [and the others], I don't see any of them really having [a sudden upswing] either this year or next. The odds of the upswing hitting in 2003, where a number of them really kick in, maybe starts to get to 25% -- for 2004, maybe 40% or 50%. That doesn't mean that we have to wait to own these stocks until 2004 or 2005. But in terms of fundamentals being absolutely stellar, you might have to wait a bit.
Q: Are there still areas of tech that are overvalued?
A: One of the areas I'm particularly worried about is communications equipment. While the stocks have done quite poorly over the past six months or so, we did see a price resurgence over the last month and a half. Some of the stocks have gone up 70% or 80%. The semiconductor names related to communications equipment went right through the roof.
So I have a sense that people don't fully recognize how bad business is and that the slowdown could be more about secular trends than cyclical trends. Communications equipment isn't that cyclical. Major secular trends that have taken place over the past 10 years have really dictated how strong those businesses were. It really hasn't been about the economy. So if you think the economy's going to come back, communications is an area that's probably not going to be helped by that.
Q: What are the secular trends that drove the communications stock boom of the 1990s?
A: We've had deregulation, which has sprung competition all over the globe. We've had privatization. We've also had the emergence of data being transmitted over communications networks in the early '90s. And then the Internet kicked in after that. So we've had all these wonderful drivers.
Q: Where will the Nasdaq go in the second half of this year?
A: If we look at the market right now, it's neither cheap nor expensive. If we see three or four different triggers line up appropriately by mid-July, we're in great shape. And we can probably finish the year at 2500 or 2600 -- a meaningful upside from here.
First, I'm looking at investors' perceptions of the impact of the Fed's actions [so far] this year [in] October or November, 2001. That seems to get more favorable almost every day. Our economists are expecting a June rate cut of 50 basis points.
The next thing is 2001 earnings estimates. When will those quit falling? Our expectation in last October was for 24% growth. We're now at a 38% decline for earnings in tech for 2001. When will that bottom out? Will it be in this June or July, or will that be September or October?
The third thing is 2002 estimates. I think they need to come down to be a little bit more realistic, and the analysts on the sell side need to start bringing them down. Will that happen by the June-July period, or will that wait till September-October?
The fourth thing are these arguments around the pace of business worsening. Is it worsening at a softening pace, or are we actually hitting the bottom, and is the slope of business going positive?
The challenge is if all those things that I'm watching don't materialize until September or October. At that point, the market is going to feel much more expensive because numbers will keep coming down. I think the odds are the things I'm looking for aligning [will take place] by, say, middle of July.
Q: Is this a good time to be buying tech stocks on the cheap if you're willing to hold them long enough?
A: I don't buy tech stocks because they're cheap. Cheap can all of a sudden look really expensive when your denominator [in the price-earnings ratio] drifts to 0. That's what we're in the middle of.
Last quarter, just as an example, we had 311 [negative adjustment] pre-announcements in tech. The highest number previous to that was 175 in the second quarter of 1998. Four quarters before that number we were at only 59 negative pre-announcements. Business is horrible, and it's not getting better just because the Nasdaq goes up for a few days in a row. Business is rotten.
Edited by Patricia O'Connell