Tech: Hot or not?
Microsoft and Dell are on fire, but AOL, Cisco and Sun are in a deep freeze.
February 22, 2002: 5:13 p.m. ET
By Staff Writer Paul R. La Monica
|
NEW YORK (CNN/Money) - Tech stocks were once like Britney Spears, the object of everyone's affection. Now they've faded faster than Mariah Carey. And yet investors, sentimental for the glory days, wait intently for signs that techs will be officially hot again.
But it's confusing out there. On Wednesday, for example, Lucent helped boost the market by reaffirming growth targets. But a bombshell of a revenue warning by Ciena a day later dashed hopes of an imminent telecom-equipment recovery.
A return to double-digit earnings growth is a good omen, with analysts expecting software companies to post a 14 percent earnings gain in the second quarter. But at the same time, bears are there to remind us about fraudulent accounting that calls all that growth into question.
In short, some companies are in an up-cycle right now, giving the Street what it wants, without the taint of Enron and accounting shenanigans. And others just keep drifting further and further toward penny-stock status.
With all this in mind we decided to play a little game -- Hot or Not? -- based on the Hotornot.com Web site at which people send photos of themselves to be rated by the community of hotornot judges. (We're more concerned, however, with the beauty of income statements and balance sheets.) Here, we look at five tech stocks and say whether they should be handled with flame-retardant gloves or cryogenically frozen.
Cisco Systems Cisco, once the market darling, is now downright frosty. To be sure, the entire networking sector is suffering from a bit of a chill right now. But Cisco (CSCO: up $0.13 to $15.24, Research, Estimates), which some optimists once thought could actually benefit during a downturn, is freezing. When Cisco reported its latest quarterly results on Feb. 6, it said that, at best, revenues would rise in the low single digit range from the prior quarter -- not very encouraging.
And it might get worse. Ciena cited spending cutbacks from two "historically important customers" in its warning. Ciena's top two customers are Qwest and Sprint...also big Cisco customers. What's more, BellSouth said on Thursday that it was slashing its capital spending budget for 2002 by $500 million.
Dell Computer The PC is supposed to be dead. But don't tell that to Dell. Or to its quirky pitchman "Steven". ("Dude, you're gettin' a Dell.") The company continues to grab market share from struggling rivals Gateway, and ill-fated merger partners Compaq and Hewlett-Packard.
The PC business has certainly been soft for the past year, and Dell did report a six percent year-over-year earnings decline in its latest quarter. But the company appears to be emerging from the slowdown. Revenue for the quarter gained 8 percent sequentially, safely ahead of estimates.
And Dell's efforts to diversify seem to be working. Sales for its enterprise unit, which include servers, switches and storage devices, increased 12 percent from a year ago and now account for 18 percent of the company's total sales.
For the year, Dell is expected to report an earnings increase of 15 percent, in line with its long-term growth rate. And for the first time in a long time, Dell's valuation is -- dare we say it -- almost reasonable. The stock trades at 32 times next fiscal year's earnings estimates. Party on, Steven.
AOL Time Warner The stock of the media giant, owner of this Web site, is languishing near a 52-week low. Holly Becker, a prominent analyst with Lehman Brothers, downgraded AOL on Wednesday, citing concerns of slowing growth in the company's flagship Internet service provider business. Janus, the largest institutional owner of AOL, has been selling shares, most recently unloading 32 million shares in the fourth quarter of last year (see more).
Adding to the stock's woes are concerns that AOL (AOL: up $0.75 to $23.75, Research, Estimates) may undertake another large acquisition in the wake of some relaxed Federal Communications Commission rules. (See "No media merger mania.") Considering that media companies like AOL are still struggling in the wake of a colossal advertising slump and are also highly leveraged, investors are worried about the effects a big acquisition would have on the bottom line. And rightfully so.
Microsoft Sure, there are lingering concerns about an antitrust settlement. But Microsoft's gaming console Xbox has been a hit. Its MSN portal had higher levels of Web traffic growth than Yahoo! and AOL in January. The company is also expected to continue to report earnings gains at a time when many blue-chip tech stocks are either losing money or reporting significant declines in profits. Analysts are predicting earnings growth of 16 percent for the quarter ending in March on a 14 percent revenue increase.
And now Microsoft has its sights set on dominating another market. Microsoft and Intel announced this week that they are collaborating on designing architecture for a new wave of smart cell phones and personal digital assistant (PDA) phones. The hope is that Microsoft and Intel will be able to dominate this space the way they dominate personal computers.
Sun Microsystems Sun is a company in transition. It announced earlier this month that it will unveil a line of cheap servers built around the Linux operating system. The fear is that Linux servers could eat into sales of Sun servers that run on its proprietary Solaris operating system.
The company is also trying to make a bolder push into the storage device market, which puts it head to head with industry leader EMC. Investors are skeptical of Sun's plans, and the stock is trading just a hair above its 52-week low.
Sun (SUNW: down $0.09 to $8.07, Research, Estimates) has lost money for the past two quarters and is expected to post a loss of 2 cents a share in the quarter ending in March. The company expects to finally return to the black in its June quarter. But current estimates for a 2 cents per share profit are still 50 percent below reported earnings for the same period last year.
Do you agree with our take on these five tech stocks? E-mail paul.lamonica@turner.com. Also feel free to let us know about other stocks that you'd like to see rated hot or not. 
|
| SPECIAL: |
|
|
|
|
|
|
