Tech Is Hit with a Mild Chill
For tech stock investors, it seems there's never any middle ground: The sky's the limit, or the sky's falling. And now, thanks to earnings misses or muted outlooks from companies as wide-ranging as Intel (INTC), Yahoo! (YHOO), Apple (AAPL), and eBay (EBAY), the sky suddenly looks a lot closer.
With a lot of fundamental tech trends still heading in the right direction, the latest tech stock implosion likely won't keep the volatile sector in the doldrums for too long. "Things are not at all that bad," says Kevin Landis, chief investment officer of Silicon Valley tech investor Firsthand Capital Management.
PICKING THE WINNERS.
But thanks to analysts' overheated expectations, a little investor greed, and understandably conservative tech executives, a perfect storm has suddenly hit tech stocks.
The upshot: For the first time in months, counting on the entire tech sector to rise is no longer a safe bet. It's time to be choosy. Investors who dug a little deeper to buy chipmaker Advanced Micro Devices (AMD), disk-drive manufacturer Seagate Technology (STX), or software maker Citrix Systems (CTXS), for instance, will likely be rewarded on Jan. 19, after those companies beat fourth-quarter expectations and hiked forecasts. Says Landis: "It's a matter of not just rounding up the usual suspects."
But that's cold comfort for investors who had been riding tech stocks' upsurge for the past few months, only to see some of the biggest names tank on Jan. 18 -- with more stock drops likely coming Jan. 19.
"The sector has had a really nice run," says Timothy Ghriskey, chief investment officer at value-oriented money manager Solaris Asset Management. "But tech stocks are always volatile, so I'm not surprised" by the declines.
Although Solaris still holds a range of tech stocks, from AMD to Cognos (COGN), the firm on Jan. 17 sold its Yahoo! stake before the Web portal released earnings. Solaris also went underweight on tech stocks in general.
The big question: Will other investors follow Solaris' self-described lucky move and continue the tech sell-off? It's early to tell, given that key players such as Motorola (MOT), EMC (EMC), Google (GOOG), and Amazon.com (AMZN) have yet to report results. But further earnings reports late on Jan. 18 present decidedly mixed signals -- and that's unlikely to bolster the confidence of investors who had hoped broad-based tech stock momentum would continue unabated.
OPTIMISM ON ICE.
Although Apple and eBay beat respective fourth-quarter forecasts, their forecasts for the current period fell short of bullish expectations. Shares of both companies fell in extended trading. And the bar for maintaining investor enthusiasm remains high, given the strong run in the tech-heavy Nasdaq, from a 2005 low of 1889.83 last May to 2332.92 in early January. It fell 1%, to 2279.64, on Jan. 18, after nearly a 1% drop the previous day.
At least on the surface, there was a wide enough range of catalysts for the Jan. 18 sell-off to give pause to even the most bullish of tech optimists. Intel, for instance, saw its shares plummet 11%, to $22.60. Thanks to weak sales of its microprocessor chips for personal computers, which it blamed on a scarcity of associated chipsets, Intel's sales rose only 6%, to $10.2 billion -- short of its own estimate, which ran as high as $10.6 billion (see BW Online, 1/18/06, "Intel's Supply Stumble"). "We're starting out in a bit more of a hole than we thought," Intel Chief Executive Paul Otellini said on a conference call.
Intel's poor showing wasn't seen as an indication of some unforeseen drop in PC sales. That would spell trouble for the entire tech sector. Investors already knew PC growth would slow somewhat from last year's 11% rise in units. But Intel's clearly losing market share to longtime rival AMD, whose stock rose 4%, to $34.15, ahead of its post-close earnings report. Afterward, AMD shares surged 11% on strong sales.
GOOD, BUT NOT ENOUGH.
Likewise, Apple reported that fiscal first-quarter profit surged 92%, to $565 million, on a 63% jump in sales, to $5.75 billion, thanks to huge demand for its iPod music players. But its outlook for its second quarter fell noticeably short of analysts' forecasts, knocking down the shares 3% in after-hours trading.
Even high-flying Internet stocks took a beating after Yahoo reported a quarter that nearly any other company would welcome. Despite reporting an 83% jump in profits, to $247 million, and a 39% rise in net revenues, to $1.07 billion, results fell short of analysts' expectations. Even more worrisome, CEO Terry Semel's first-quarter guidance fell slightly short of Street forecasts. Its stock plunged 12%, to $35.18, on Jan. 18.
Mild as it was, Yahoo's miss on forecasts inflicted collateral damage on its chief rival, Internet god Google -- even though analysts speculated that it was Google's gains that kept Yahoo's results in check. Google won't report results until Jan. 31, but its stock fell 5%, to $444.91. Another reason: Two analysts slapped sell ratings on Google, citing a break in the momentum over Internet advertising growth -- at least among investors (see BW Online, 1/19/06, "Is Google Out of Steam?").
But some analysts also wonder if Google's breakneck growth can be sustained (see BW Online, 1/04/06, "Google: $600 or Bust?"). Scott Devitt of Stifel Nicolaus noted that in the past year, major e-commerce players, from eBay to GSI Commerce (GSIC) have noted diminishing returns from rising pay-per-click advertising rates. eBay, for one, turned again to TV ads last year in a bid to capture new customers. Most analysts, however, are betting Google has plenty of room to grow.
E-commerce stocks aren't being spared from investor scorn, either. eBay easily beat fourth-quarter forecasts, as profits jumped 36%, to $279.2 million, on a 42% rise in sales, to $1.33 billion. But it didn't change its first-quarter and 2006 forecasts, which fell a few pennies per share short of analysts' predictions. Some analysts noted that eBay seems to be taking a very conservative stance, so in after-hours trading, the stock was down only 3%.
Taken together, the disappointments have investors heading for the hills -- not just tech investors, either. The S&P 500 fell a fraction of 1%, to $1277.93, on Jan. 18, thanks largely to the bearish Intel and Yahoo news. International stock indexes were hit even harder. European shares on Jan. 18 fell to two-week lows, thanks to a downgrading of the entire telecommunications sector by the investment bank Dresdner Kleinwort Wasserstein. And the Nikkei index in Japan fell 3% on Jan. 18 after declining 2.9% the day before, driven down partly by a government raid on the Internet high flier Livedoor, which is suspected of concealing losses (see BW Online, 01/18/06, "High Drama on the Tokyo Exchange").
For all that, though, tech analysts aren't too worried about a sustained decline in tech stocks at large. "I view these (earnings misses) as one-off situations for these companies," says Pip Coburn, CEO of Coburn Ventures, a tech consulting firm in New York. He thinks tech spending will be about 4% to 5% higher this year. While that's hardly barn-burning growth, he sees plenty to keep growth humming at many tech companies.
Indeed, many are faring just fine. IBM (IBM), for instance, reported better-than-expected fourth-quarter results, earning $3.2 billion on continuing operations, or $2.01 a share -- 7 cents higher than analysts forecast. Despite revenue falling about 1%, to $24.4 billion, IBM saw strong growth in small "blade server" computers and in consulting (see BW Online, 01/18/06, "Big Blue Is in the Pink"). What's more, says IDC analyst Frank Gens, "it's a pretty good outlook for this year and beyond." As a result, IBM's stock rose almost 2%, to $84.46, on Jan. 18.
Some tech stocks are faring far better. AMD's jumped in extended trading thanks to its better-than-expected fourth quarter, when it apparently continued gaining on longtime and much larger rival Intel. AMD earned a profit of $96 million, reversing a loss of $30 million a year ago, on a 45% rise in sales, to $1.84 billion. Even more important, it said first-quarter sales would rise 70%.
"A MATTER OF TIMING."
Such bright spots, coupled with the plain fact that most tech companies are still doing quite well on the bottom line, indicate that underlying tech spending isn't the problem. "The outlook for tech is really very positive," notes venture capitalist John Sculley, former CEO of Pepsi and Apple. "Consumer electronics and all kinds of new products are taking off, and in big numbers. The concerns now are more a matter of timing, of how long it will take companies to take advantage of a new market."
It just won't be smooth sailing for everyone. So now, it will be up to investors to figure out which tech ships are seaworthy enough to board safely. Even then, they had best wear life jackets.