As Nasdaq Drops, Analysts Forecast No Fast Turnaround for Tech Stocks

How sour has Wall Street gone on tech stocks? On Tuesday, not one but two major brokerages took a whack at the beleaguered sector.

The broader of the two blows came from Merrill Lynch & Co. strategist Steve Milunovich, who predicted that tech stocks won’t rebound until the second half of 2001. Further, he said profit growth at technology companies overall may slide to 10% this year, from a rate of 32% in 2000.

More narrowly focused, but perhaps just as damaging, was Robertson Stephens analyst Dane Lewis’ downgrading of a slew of networking and data-security stocks.

The result was a less-than-happy new year for the tech-heavy Nasdaq composite index, which plunged more than 7%. The decline in the first trading session of 2001 dampened some hopes that the new year would bring immediate relief from the tech sell-off that drove Nasdaq down almost 40% last year.

Milunovich, Merrill’s chief global technology strategist, wrote in a report to clients that growth in corporate spending on technology will slow to 16% in 2001 from a 26% growth rate last year. At the same time, continuing improvements to the Internet are expected to boost computer-data storage and fiber-optic companies.

Releasing a set of predictions for the year, Milunovich also said a Merrill survey from December suggested that companies are interested in spending on hand-held computing and e-mail devices, data storage, wireless products, databases and servers. They are less interested in spending on mainframe computers, consultants and software to analyze corporate information in databases.

“Fundamentals are likely to be disappointing through at least the first half,” Milunovich wrote. “The news should improve in the second half as likely Fed rate cuts begin to affect the economy and earnings momentum improves.”

The Merrill survey cited No. 1 software maker Microsoft (ticker symbol: MSFT), No. 1 computer-networking company Cisco Systems (CSCO), No. 1 personal-computer maker Compaq Computer (CPQ), server computer maker Sun Microsystems (SUNW), and data-storage rivals Network Appliance (NTAP) and EMC (EMC) as likely to benefit most from technology spending during 2001.

Fiber-optics equipment makers that could see growth, he said, include Nortel Networks (NT) and Corning (GLW).

Some of these same stocks were targeted by Lewis, who lowered his ratings on EMC, Network Appliance and 10 other data-networking and security stocks, including Veritas Software (VRTS), CacheFlow (CFLO), Quest Software (QSFT) and Inktomi (INKT).

Among these issues, EMC plunged $12.19 to $54.31, Network Appliance sank $12.75 to $51.44 and Veritas slumped $21.50 to $66.

EMC rose 22% in 2000, while Network Appliance advanced 55%. Before Tuesday’s decline, EMC still sold for 65 times this year’s expected profit per share as investors bet the need for data storage would be so great that companies would buy equipment and software even as they cut back on other computer spending.

Now, Lewis said, he doesn’t expect the stocks to be a haven. “The impact of this spending slowdown will be dramatic enough to impact even storage and security vendors that we previously viewed as relatively immune,” Lewis said in a note to clients.

Group Lowers Stock Investment Figure

Oops.

The Investment Company Institute, the trade group for the mutual fund industry, said it overestimated the amount of cash taken in by fund companies in November by 35%.

Last month, ICI reported that stock mutual funds took in $8.8 billion in net new cash from investors in November--the lowest since February 1999. On Tuesday, ICI said the actual amount was $5.7 billion.

The trade group said the change was due to a revision in the cash flow numbers for global stock funds, which invest in both U.S. and foreign stocks.

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Still Plenty of Profits to Take

Despite the dive in technology stocks since spring, many major tech issues remain far above their prices of a few years ago--meaning that long-term investors in the stocks still have substantial paper profits. The question now: Whether many of those long-term investors will choose to sell rather than risk a further price meltdown.

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Ticker Price on Tues. Pctg. gain Stock symbol 1-1-98 close since 1-1-98 Siebel Systems SEBL $5.23 $54.00 +933% EMC EMC 6.86 54.31 +692 America Online AOL 5.66 32.29 +470 Sun Microsystems SUNW 4.98 25.44 +411 Vitesse Semi. VTSS 9.44 47.13 +399 Adobe Systems ADBE 10.31 46.73 +353 Corning GLW 12.38 47.38 +283 Cisco Systems CSCO 9.29 33.31 +259 Tellabs TLAB 26.44 50.31 +90 Intel INTC 17.56 31.06 +77 Nasdaq composite 1,570.35 2,291.86 +46

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1998 prices are adjusted for any stock splits since.

Source: Bloomberg News, Times research