If you chose (a), then “Gotcha!” Because for all the hype and hoopla over the Internet, an astonishing number of these once hot high-tech plays have turned out to be dogs. That’s the lesson in numbers from Digital Video Investments, a multimedia research firm in New York. Of the 34 newly public Internet companies the firm tracks, only three stocks are selling above their initial offering price. The remaining 31 have lost more than half their value since they first began to trade. And what about the Big Three, C/Net, Netscape and Yahoo!? They’re off, too, once you factor out those big first-day gains that go to only a well-connected few. Your money would have done better under a mattress.
That says a lot about why high-tech stocks are in trouble. But first, a few acknowledgments. Yes, initial public offerings are notoriously risky. And clearly, established “brand” technology companies have enriched many investors who sagely bought their shares. Intel, up roughly 340 percent over the last three years, has for the most part defied the industry bear. So has Microsoft, which soared last week on stellar earnings. And yet… even as Microsoft shone, the Morgan Stanley High Tech Index declined. It’s down more than 8 percent this year; the technology-heavy NASDAQ index has shed 11 percent since its Jan. 31 high. Meanwhile, the S&P 500 is up 3.5 percent for the year. Bruce Lupatkin, an analyst at Hambrecht & Quist in San Francisco who’s helped bring a bevy of high-tech giants public, calls it a “rolling correction” that shows no signs of losing steam. The Dow goes up and down, but there is no broad pall over the market. Not so with tech stocks. They’re likely to be in the dumps for at least another six months, if not more.
First, the consumer market is turning out to be softer than expected. After three years of 20 to 30 percent annual growth, PC sales fell by 1 percent over the last year, according to the latest figures from Computer Intelligence in La Jolla, Calif. Sales of higher-end (and therefore more profitable) machines were down 28 percent. Leading manufacturers, such as Compaq, continue to post healthy earnings. But the slump will inevitably have spillover effects, analysts warn, squeezing revenues for everyone from software publishers to modem manufacturers to online information services.
And the robust corporate market also shows signs of slackening. The reason, according to Lupatkin: a difficult series of what he calls “architecture” and product transitions. Once upon a time, companies merely had to decide how many PCs to buy and what version of Windows to run on them. Now the decisions are much more complicated and costly: what kind of corporate “intranets” to build; what sort of database to create; how to electronically link offices, salespeople and suppliers. That means many large corporate purchases are being delayed–and it’s still far from clear which technology companies will win and which will lose. Says Lupatkin, “It will be a very unpredictable and turbulent year.”
That sort of uncertainty makes investors nervous. Scott Slayton at Morgan Stanley puts it bluntly: “They want out of aggressive, growth-oriented technology stocks.” Last week the rush to the exits resembled the mania that drove tech up in the first place. Case in point: Clarify. After the software maker missed its first-quarter- earnings target last Tuesday, its stock spiraled from $22 to $7. That’s when Roger McNamee at Integral Capital Partners, a high-tech investment fund in Menlo Park, Calif., began to buy. “It’s a great company,” he says. “There just aren’t any buyers out there.”
There’s a lesson here, too. Technology stocks have always had periodic ups and downs. Remember the PC boom of the mid-’80s that was never supposed to end? The mistake many investors have made is to buy the Info Age hype that this time is different, that today’s technologies are so vital to the nation’s economic health that tech stocks can go nowhere but up. Now the market has abruptly proved the hypesters wrong. But does that mean the opposite is true? Hardly. The digital revolution will produce yet more Microsofts. We’re just going to have to look a little harder (and a little more sharply) to find them.
