Tech Is Just Having Growing Pains--Not a Crisis
You would never know from looking at the wild action on Wall Street last week that underlying trends are healthy in the computer technology industries--semiconductor chips, software, network communications.
Among the week’s prominent events, Intel stock dropped 10% on Wednesday, IBM’s stock bounded up 16% in two days and Apple Computer soured investors by reporting a loss and forecasting further losses. Microsoft reported dramatically higher profits, and its stock gained new respect as technology’s bellwether.
Billions of dollars in value changed hands in a few days. But was there a crisis? Has technology reached another turning point?
Not at all. Wall Street was worrying that computer sales would be up only 20% this year after soaring 35% last year. But even if true, anxiety about 20% growth is a high-class worry.
And simple evidence of electronic processors in everything from car engines to portable telephones, plus fierce demand from companies large and small for computer communications, suggests that forecasts understate the growth of new business.
Still, technology progresses slowly. Owning a computer today is like owning a car in 1915--roads are relatively undeveloped and you have to do a lot of the work yourself, crank-handle starters then, balky software now.
And that’s part of the problem for technology stocks. Investors are not nearly as familiar with computers as they are with cars, soft drinks and soap suds. So they’re prone to see crises at every turn.
One way to banish fears and gain an understanding of what’s ahead is to listen to small businesses on the front lines of advancing industries.
A panel of such companies at an MIT Enterprise Forum in Ventura the other night was in no doubt about the strength of business.
Melvin Flowers, chief financial officer of ACT Networks, a Camarillo firm that sells internal data networks so that companies can share information across town or around the world, says business is brisk. One reason: new freedom. In the telephone age, only large companies could afford internal networks. In the new age, small companies can.
Michael Thoben, chairman and chief executive of Interlink Electronics, also in Camarillo, says that within “months, not years” his firm will market a remote control for the Internet. Point the remote, as with a television or VCR, and search a thousand sites on the World Wide Web.
Consumers may not be ready for that, but stockbrokers, traders and other business people who sit at terminals all day will appreciate the chance to walk around and research information from across the room.
Terry Kinninger, chief financial officer of MetaTools, Inc., a Carpinteria, Calif., company that raised $54 million in a December public offering, says the market for his firm’s sophisticated computer graphics will grow exponentially as cable companies expand bandwidth and make Web sites interactive in every home.
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That day may come but not immediately, suggests Paul Saffo, an analyst at Institute for the Future in Menlo Park, Calif. First, fiber optic cable must be extended to homes at a cost of sizable investment. Cable and phone companies will install the fiber lines, but it will take a few years.
Meanwhile, the next trend will be in more sophisticated sensors, Saffo says.
That’s cutting edge research in the laboratories of Caltech in Pasadena, where professor Rod Goodman talks of semiconductor chips “with a lot of tiny legs so they can clean your windows all day.” Home windows? Not a likely market. But office-building windows? Yes.
The upshot: Business markets once again will be the focus of growth for technology as consumers take a breather. The next big consumer product, the much-talked-about $500 machine that provides access to the Internet, may be on sale for Christmas 1997.
But business demand for computer communication right now is “unbelievable,” says Prabhat K. Dubey, president of MMC Networks, a Santa Clara, Calif., company that has developed inexpensive network switches.
Yet amid seemingly rapid change, we should keep in mind that the “information revolution” has been with us for over 150 years, or since Samuel F.B. Morse and the telegraph. Computer networks are direct descendants of telephones, made possible by the twin inventions of the semiconductor and the laser.
For investment, it’s worth noting that leading companies in one era move with difficulty into the next. RCA is gone, television networks are going, AT&T; is struggling to adapt--and so is IBM.
And the current volatility represents only a market blip, not a turn in fundamental technology, says analyst Daniel Klesken of Robertson Stephens, a brokerage specializing in high-tech research.
Still, the market is choosing winners and losers, creating bargains in some companies, possibly dooming others to oblivion.
Of last week’s prominent stocks, Intel is a company with more going for it than the price volatility would indicate, says Roger McNamee of Integral Capital Partners, a Silicon Valley investment company. “Look at the continuing demand for microprocessors,” he says.
IBM’s surge at the end of the week reflects strong computer services and software operations, says Bob Djurdjevic of Annex Research in Phoenix. IBM may not make much profit from its $10 billion in sales of personal computers, but it sticks with the business to remain in the mass market.
However, the outlook for Apple Computer remains ominous, say many experts who didn’t wish to be quoted. The company will probably be acquired for its easy-to-use Macintosh operating system, the crown jewel that Apple for many years refused to license to other computer makers.
It was a profitable strategy for a while, but now the company has been so weakened that potential buyers--IBM, Hewlett-Packard and Sun Microsystems have been approached--seem unwilling to pay a premium.
In an industry that looks forward to what is to come, Apple looks increasingly like what might have been.
