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News > Technology
Have techs hit bottom?
May 3, 2001: 7:29 a.m. ET

As investors absorb the latest data, an air of caution remains
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NEW YORK (CNNfn) - Stocks in the technology sector have rebounded sharply in the wake of the latest round of earnings reports and growth forecasts from leading tech companies. Could the downturn that has weighed on the sector in recent months be near its bottom?

That depends on who you ask, and which specific areas of technology you're talking about. And even those tech-industry executives and analysts who are voicing some optimism about future profitability in the sector are doing so with caution.

In the PC hardware and semiconductor segment, the messages have been mixed.

First, Intel (INTC: Research, Estimates), the No. 1 supplier of PC microprocessors, reported a first-quarter profit that narrowly beat lowered expectations. And while Intel executives slightly lowered their revenue forecast for the second quarter, they also said they see signs that the processor business is stabilizing and they expect a stronger second half of the year.

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The semiconductor industry historically has been characterized by boom-

and-bust cycles, with periods of undersupply and high prices followed by spells of overcapacity and slumping profitability. The most recent downturn in the chip business began late last fall.

Some investors interpreted Intel's results as a sign that the chip industry was near the bottom of the downturn, a conclusion Salomon Smith Barney analyst Jonathan Joseph, who was one of the first to call the downturn, came to several weeks ago.

Joe Osha, semiconductor analyst at Merrill Lynch, disagreed, warning his clients that it's too soon to make that call.

Check on semiconductor stocks

Then Compaq (CPQ: Research, Estimates), the world's second-largest supplier of PCs, logged a first-quarter profit that missed its lowered expectations and substantially reduced its financial targets for the second quarter, saying it expects sales to decline by as much as 20 percent. Executives at Compaq attributed the shortfall to a buildup of inventory in the distribution channel.

Executives at IBM (IBM: Research, Estimates), a diversified computer hardware, software and technology services provider, also pointed to the PC as a source of weakness when they reported the company's latest results.

PC vendors have been struggling since the fourth quarter, after the slowing U.S. economy resulted in much lower-than-expected sales. Vendors such as Compaq built too many systems in anticipation of the typically strong holiday season, which didn't turn out to be so strong after all.

Since the PC segment was one of the first areas of technology to tank, many were looking to it for the first signs of a recovery.

"Although there was some improvements in the PC chain in February/March, April is showing weakness," Merrill Lynch technology strategist Steve Milunovich told his clients this week.

"We think it's premature to call the turn," Milunovich added.

Meanwhile, investors on Wednesday converged on shares of Cisco Systems (CSCO: Research, Estimates), as well as the stocks of other suppliers of networking equipment amid signs that many tech outfits are on their way to burning through the glut of inventory that has been weighing on their bottom lines.

Click here for CNNfn.com's tech stock report

Networking-equipment suppliers such as Cisco have been particularly hard hit by the slowdown in the U.S. economy, which has prompted most telecommunications service providers to either defer or cancel new equipment orders.

In a research note to clients Wednesday, Morgan Stanley networking analyst Christopher Stix said the company still is facing a difficult market among the telecommunications service providers, but at the same time, sales to large corporations, referred to as "enterprise customers," appeared to be firming.

Market observers attributed Wednesday's run-up in networking stocks in large part to investors wanting to embrace any signs of life in the beaten-down segment.

'Not a pretty story' behind the numbers

But the forecasts technology executives are providing for growth in the coming quarter suggests rough going, according to Chuck Hill, research director at First Call, which tracks corporate earnings results and projections.

Hill told CNNfn's Before Hours program this week that the technology  companies that have reported their latest results so far have come in about 39 percent below their levels from the year-ago quarter, and the expectations moving forward are even worse.

"The estimates are for earnings to be down 50 percent in the second quarter, 37 percent in the third quarter, and 12 percent in the fourth," Hill said, noting that the fourth quarter last year was one of the worst on record for a raft of technology companies.

"We went from 42 percent growth in the third quarter to only 3 percent in the fourth quarter, and down about 40 here in the first quarter," he said. "So, technology is not a pretty story, nor is the communication services area that kind of tags along with it."

Still, some money managers and analysts are cautiously moving back into tech, betting that some select names will benefit from an upturn possibly by the end of the year.

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For example, Fred Sears, a portfolio manager at Investor Capital Funds, told CNNfn's Money Gang this week that it may be safe for some investors to begin dabbling in the sector. He said they should zero in on companies that have proven track records and have logged solid earnings, recommending specific names such as EMC (EMC: Research, Estimates), the leading supplier of data-storage systems, and Advanced Micro Devices (AMD: Research, Estimates), the second-largest supplier of PC processors.

"But I wouldn't be in a rush to buy these stocks right now," Sears said. "Maybe buy a little bit. Keep your powder dry, and wait a couple of months, see what happens. I'm very worried about May. What is going to happen in the summer doldrums? Perhaps the market will correct again. You've got to be very careful here. So remember, buy stocks with earnings -- that's my opinion."

Robert Walberg, technology stock analyst at Briefing.com, is a bit more optimistic.

"The bear market in technology's over, and I think we're headed higher from here over the next several months," Walberg told CNNfn's The N.E.W. Show this week.

"It's not going to be straight higher, there's still a lot of overhead resistance, the fundamentals are still quite murky for the second quarter and into the third quarter a bit," Walberg added. "But in general, sentiment has shifted now to become much more bullish, and it's very difficult for sideline cash to fight both the tape, with the tape improving considerably, as well as the Fed."

A dot.com Renaissance?

Better-than-expected earnings reports from some Internet companies, specifically in the online travel services area, have given a lift to the dot.com segment as well.

And the shakeout that has been taking place throughout the industry has Prudential Securities Internet analyst Mark Rowen saying there could be just as much reward for the companies that emerge from it as winners as there was risk for those that ultimately met their demise.

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  After the bubble, the whole sector really started to crash and burn. But just like there was excess on the upside, there was excess on the downside.  
     
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  Mark Rowen
Prudential Securities
 
"After the bubble, the whole sector really started to crash and burn," Rowen told CNNfn's Street Sweep. "But just like there was excess on the upside, there was excess on the downside, and what we're seeing now is that there are some real companies addressing very large markets that are now, for the first time, reaching scale and beginning to get to profitability."

Among those dot.coms that reported their first quarterly operating profits during the most recent earnings season are Homestore.com (HOMS: Research, Estimates), which provides real estate listings and related content, as well as online travel services providers Expedia (EXPE: Research, Estimates) and Travelocity (TVLY: Research, Estimates).

Although he acknowledged that the dot.com group tends to be volatile, typically moving in tandem with the ups and downs of the Nasdaq composite, Rowen said more money is flowing into the segment, which was one of the poorest performers last year.

"There's certainly been much more interest since the beginning of the year than there was late last year," he said. "Late last year there was almost zero interest in this sector, but once the stocks start performing better and once the underlying fundamentals of the company begin to improve, the investment follows." graphic

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.