This article is from the March 20, 2001, issue of Red Herring magazine.
For technology investors, the year 2000 was to 1999 what New Year's Day is to New Year's Eve: the hangover after the big party. Expect a return to normalcy in 2001. In other words, expect more than a few gut-wrenching turns in the technology world in coming months, due to continued nail-biting over the fundamental health of the sector and anxiety over the appropriate prices for technology's best companies. Nimble traders and stock pickers who make timely decisions will generate the strongest returns.
With the Nasdaq's peak in March 2000, the foundations of one of the most thematically driven markets in history began to crumble. Seemingly great opportunities instead became exposures. Investors fretted over dot-com exposure, telecom-spending exposure, wireless exposure, PC exposure, and chip-inventory exposure. As 2001 wears on, these exposures will seem less threatening. So what will shock investors in 2001? Here are a handful of predictions for the remaining months of 2001.
BUYGONE DAYSValuation will matter again for all technology stocks. Next-generation bellwether issues like BEA Systemsя(Nasdaq: BEAS), Brocade Communications Systemsя(Nasdaq: BRCD), i2 Technologiesя(Nasdaq: ITWO), JDS Uniphaseя(Nasdaq: JDSU), Juniper Networksя(Nasdaq: JNPR), and Siebel Systemsя(Nasdaq: SEBL) will be traded more actively. Most will develop wide but stubborn trading ranges. Great stock picking will be a matter not just of picking great companies, but of buying strong companies at reasonable prices.
An improving economy and rebounding spending on communications and PCs will justify the upswing in semiconductor and semiconductor equipment issues. In the face of the turn, analysts have become increasingly negative on semiconductor stocks, due to limited visibility and pricing power in early 2001. But as is so often the case, technology stock prices will bedevil most people (and the analysts who follow those stocks).
The PC business will enjoy a period of vastly improved growth in the second half as the Windows 2000 product cycle finally takes off. But Wall Street analysts will mistakenly suggest that the PC recovery signals a period of renewed sector growth. Microsoftя(Nasdaq: MSFT) should strongly outperform technology stocks and the S&P 500 as Windows 2000 powers improved cash flow. The Microsoft antitrust trial will end with a complex agreement that involves a $15 billion fine but no breakup of the company.
The e-tailing segment will remain largely anemic for the next 12 months. However, Internet advertising prices will stabilize, most likely in the third quarter. Investors will also become more adept at valuing new-media properties. AOL Time Warnerя(NYSE: AOL) will recover before Yahooя(Nasdaq: YHOO). Even DoubleClickя(Nasdaq: DCLK) will rebound. In fact, DoubleClick will likely enjoy stronger full-year returns than AOL Time Warner and Yahoo.
Wireless application protocol will get more traction than general packet radio services (GPRS) as the wireless communication standard. While GPRS has lower user costs and faster transmission speeds, without a keyboard and a mouse that can fit in your pocket, the wireless Internet experience will remain far inferior to the wired version. Only when cellular handset companies come up with products that use the Palm OS (or at least begin to look more like today's other handheld computing platforms than phones with ten-digit keypads) will handset volumes again grow at the pace to which the industry had become accustomed.
More than 90 percent of the Internet marketplace initiatives that have been announced will fail to be constructed. Companies will admit that agreeing on the wording of press releases was far easier than agreeing on any subsequent decisions. Most will have a very hard time agreeing on much else, including choice of management, location, and technology vendors -- as well as which participants will be required to part with their valuable supply chain secrets to advance the co”perative. In the long run, this shift will prove negative for Aribaя(Nasdaq: ARBA) and Commerce Oneя(Nasdaq: CMRC). The failure of these cartels will force companies to buy and build on their own the Web infrastructures they need for the ongoing operation of their businesses -- rather than share the costs Soviet-style.
Arnold Berman is a managing director and technology strategist at Wit SoundView and is chairman of the firm's stock selection committee. Write to letters@redherring.com.