Wall St. Pullback Reflects Tech Blowout

Aug. 14, 2004
By Dick Satran

NEW YORK (Reuters) - Wall Street's long-playing drama, "Waiting for Google," is about to reach its final act, but its stock market debut is ending up as more of a nostalgia event than the catalyst for a new era.

The tech sector is mired in one of its biggest downturns of recent years, and the debut of the much-touted search service on Wall Street next week won't do much to restore its faded glory, fund managers and analysts say.

After weeks of heavy losses, tech stocks may be reaching a stage where they are getting attractive, and a successful Google bid could be a catalyst for a rebound. Google said it will announce the price of the IPO next week. But the IPO will do little to minimize the deeper concern that earnings are slowing down for most of the best-known tech companies.

"This sell-off is not going to go on forever. The stocks are probably oversold," said Mark Herskovitz, manager of the Dreyfus Premier Technology Growth Fund. "But there are concerns about the long-term growth prospects."

Profit growth has been one of Wall Street's biggest worries for a wide range of stocks, not just tech issues. The Dow industrials <.DJI> and the S&P 500 <.SPX> are both down about 4 percent since early July amid worries that the economic expansion has run its course and earnings have peaked.

TECHS IN A SLUMP

But tech stocks are mired in a much deeper slump, skidding through their worst patch since the bull market started nearly two years ago. In the past six weeks, the tech-heavy Nasdaq <.IXIC> has fallen 14 percent.

Some of the best known names in technology have slid even harder. Ebay Inc. <EBAY.O> has fallen 14 percent and Yahoo Inc. <YHOO.O> 20 percent. Cisco Systems Inc. <CSCO.O> is down 22 percent in the same time period, Advanced Micro Devices Inc. <AMD.N> 27 percent and LSI Logic Corp. <LSI.N> 38 percent.

Despite these declines, the tech stocks still can't really be considered bargains, either, analysts said. Earnings have rebounded smartly over the past year in the tech sector as it recovered from a disastrous 2001-2002 retrenchment. But much of it has been through cost-cutting. and revenue growth has been relatively modest.

The big rebound in the stocks last year already has largely been accounted for in the stock gains seen last year, and "there is no plausible reason to believe they will accelerate from this point forward," said Barry Randall, a tech fund manager at U.S. Bancorp Asset Management. "The Nasdaq stocks went up 50 percent last year. Now we're just passing some of the same points on the way down."

CHANGING PERCEPTIONS

The tech stocks are trading at about 23 times next year's earnings, Randall figures, while the market as a whole is trading at just 15 times. But while they still command a high premium, they don't have the "pixie dust" -- the earnings power -- to justify it, said Randall. "Perceptions have to change."

Some of the best-known companies, including Cisco and Hewlett-Packard <HPQ.N> have fallen by double-digit, 1-day declines recently after giving disappointing forecasts.

"Investors have come to love these names (of leading technology stocks) because of their phenomenal growth record. And on a historic basis the stocks look cheap," said Herskovitz. But their growth rates have slipped well below their "historic" averages.

Industry bellwether Cisco has had annual revenue growth average 47 percent since its founding, Herskovitz said. But over the past five years the average gain has slowed to just 5 percent.

Similar slowdowns have been seen with Intel Corp. <INTC.O>, Oracle Corp. <ORCL.O> and Microsoft Corp. <MSFT.O> Yahoo and eBay have continued to report strong, double-digit-plus revenue growth this year. But even the fast-growing Internet-based concerns have been warning of a slower revenue expansion next year.

COMPANIES TOO SUCCESSFUL

"These companies have gotten too big and too successful to expect a lot more from them," said Herskovitz. "That doesn't mean there are no opportunities out there. We're just going to have to look elsewhere for growth."

But will Google fit this bill? It has had an enthusiastic following and has shown dramatic growth over the past year. Still, its growth arc is expected to flatten out in 2005 and some tech investors see it as more of a media company than an innovative tech concern.

Indeed, with $1 billion in sales already, investors are buying into a more mature company than they did when they bought into IPOs of Microsoft, Yahoo and Netscape, which went public with sales below $100 million.

"There was a tremendous amount of enthusiasm for Google until people saw the details on the offering. Then there was less enthusiasm," said Herskovitz, who says he does not plan to buy into the IPO.

Randall said that Google represents "a tremendous business model at the right price," and he plans to participate in the IPO auction. But he wouldn't disclose the price he would bid and he described it as being "not truly a technology stock" but more of a media stock.

"I'm not looking for them to lead a rebound in technology stocks," Randall said. "If they do well when they start trading, it isn't going to be a harbinger for the tech sector."

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