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Techs baffle investors
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October 21, 1999: 5:47 p.m. ET
What's an investor to do amid the mixed signals coming from the tech sector?
By Staff Writer John Frederick Moore
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NEW YORK (CNNfn) - One day, technology stocks appear to be on top of the world as Microsoft Corp. reports strong earnings. The next day, IBM sinks the market with a gloom-and-doom earnings outlook. For investors, the signals coming from the tech sector are mixed, to say the least.
A quick glance at recent earnings results and forecasts from several technology bellwethers makes it clear why investors are so skittish.
Last week, a disappointing third-quarter earnings report from Intel Corp. (INTC) sparked a sell-off in already beaten-down technology shares.
Earlier this week, Dell Computer Corp. (DELL) warned analysts that its fiscal third-quarter results would come under pressure due to an unexpected rise in memory-chip prices in the aftermath of last month's earthquake in Taiwan.
Just when it seemed as if the bottom was falling out for tech shares, Microsoft (MSFT) came to the rescue on Wednesday with an upbeat earnings report that sent technology shares surging.
Investor giddiness proved to be short-lived, however, after IBM 's (IBM) bombshell Wednesday that its fourth-quarter and fiscal 2000 first-quarter earnings would fall far short of Wall Street estimates.
The warning sent investors running for cover.
The question of the day: Which tech stocks should investors buy, and which ones should they stay avoid?
Quality is the No. 1 concern
Analysts believe the see-saw ride tech stocks have endured the past few weeks is a signal to make sure the high-quality technology names are included in investors' portfolios.
"Take advantage of the volatility that's going on right now," said Art Russell, technology analyst at Edward Jones. "You can liken it to a sale at Macy's. It's a good time to round out your positions while these stocks are down."
Despite - or because of - IBM's woes, some analysts believe now is the right time to scoop up some of its stock. In Thursday trading, IBM shares tumbled 15-5/8 to close at 91-3/8, well below its 52-week high of 139-3/16.
Technology earnings have been all over the map this quarter
Analysts believe IBM will eventually recover and now is a good time to get in on the ground floor.
"If you look at what's driving the company - services, software, intellectual property and component technology - there were no changes in what we were expecting" for the third quarter, said John Jones, technology analyst at Salomon Smith Barney.
Jones, who is maintaining his "buy" rating on IBM stock, noted that "those business represent 55 percent of their revenues and 70 percent of their earnings. Those business and trends remain healthy."
Mixed signals
Adding to investor confusion was IBM's statement that Y2K-related issues would cut into its earnings. Sales of IBM's mainframes computers dropped significantly as large corporations cut their spending until they're confident that their systems are Y2K ready.
Meanwhile, companies such as Microsoft and Sun Microsystems Inc. (SUNW) have shrugged off Y2K concerns. IBM itself had previously told Wall Street that its business would remain unaffected by Y2K issues.
Investors have also had to parse the Taiwan situation in recent weeks. After the earthquake knocked the region's chip foundries out of commission for about two weeks, computer and chip companies were quick to point out that they didn't expect any adverse affects on their upcoming results.
Since then, however, Hewlett-Packard Co. (HWP), Dell, Apple Computer Inc. (AAPL), Intel and Advanced Micro Devices Inc. (AMD) have all warned of the effects the Taiwan quake will have on upcoming results.
The Nasdaq composite index has been bombarded with both positive and negative news this week
The mixed signals coming out of the tech sector are enough to make even the most savvy investor's head spin, and some analysts say it's best to approach tech stocks on a company-by-company basis.
"Quite frankly, what we've seen with a lot of tech companies in this third-quarter earnings reporting period, is a dichotomy," said Megan Graham-Hackett, technology analyst at S&P Equity Group.
"There are some companies that are doing quite well, their businesses are on track. Other companies are prone to the Taiwan quake. IBM was prone to the fact that it concentrates on mainframe sales. Every company has a little pressure button, and this quarter is filtering that out. So you can't do a broad-brush stroke. We've said that before with tech stocks, and it continues to be true."
Russell, however, believes investors would be wise to mostly stay away from PC companies and focus on networking and software firms.
"Of all the sectors, the least attractive is the PC area, with prices falling and all that," he said. "The most attractive are the networking and software companies. Oracle (ORCL) is the database powering e-commerce, and there's a tremendous opportunity going forward. It has a 70-percent market share on the Web. As there's more information on the Web, there's a need for more databases."
Nonetheless, investors can expect continued volatility across the tech landscape until the end of the year. In the meantime, analysts recommend investors look for bargains before these once-high-flying stocks take to the skies again.
"Pick up these stocks while they're on sale," Russell said. "I think January will be very strong as we survive the whole Y2K issue."
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