) reported earnings that would have produced yawns on Wall Street at the height of the tech boom. Profits rose 10%, to $729 million--mostly thanks to cost cutting--on flat sales of $4.8 billion. CEO John T. Chambers was cautious, saying he saw no real signs that the prolonged high-tech spending slump was ending. And many analysts concurred. "It's far too early to break out the party hats," says Steve Kamman, network analyst at CIBC World Markets.
Nonetheless, tech investors went wild. Cisco's stock jumped 24% the next day, and the tech-heavy Nasdaq went on a 305-point joyride before losing most of its gains over the rest of the week. Tech stocks soared even higher the next week, goosed by positive retail sector spending numbers and a speck of good news from the chip-equipment sector. And valuations for most tech companies remain high.
Yet for all the optimism, most tech execs say they see no turnaround in sight until early next year at best. Hewlett-Packard (HPQ
) CEO Carleton "Carly" S. Fiorina believes a muted recovery in the second half is still possible. "But we are not counting on a meaningful improvement in spending until 2003," she says.
So why the disconnect on the Street? Credit part of the rally to short-sellers covering their losses off good news. But beyond that, many investors are simply feeling impatient. "There's a contingent that's bound and determined to earn back what it lost in this sector," says Thomas McManus, chief investment strategist at Banc of America Securities in New York.
The optimists also seem to believe that tech will rebound quickly on the back of an economic recovery. That view got a boost on May 14 when retail sales figures for April climbed 1.2%, blowing past expectations for a 0.7% jump. The same day, tech bellwether Applied Materials Inc. (AMAT
) in Santa Clara, Calif., said it expected third-quarter orders of its chip-manufacturing equipment to rise 10% to 15% from the second quarter, further buoying tech stocks. "This rally's for real," asserts James M. Weiss, chief investment officer for equities at State Street Research in Boston.
There's a danger, however, in reading too much into Applied Materials, whose gear gets snapped up whenever heavyweights such as Intel Corp. (INTC
) upgrade factories or build new ones. That's happening now, although most chipmakers say they don't know when end-user demand, particularly in the corporate sector, will roar back.
So does this rally have staying power? Probably not. For one thing, many tech stocks are fully valued, says Scott M. Black, president of Delphi Management Inc. in Boston. Cisco is trading at 47 times earnings. And while Oracle Corp.'s (ORCL
) p-e ratio has fallen sharply to around 21 times earnings, Black says the stock is still no bargain because the company's profits could slip further. Even if the tech market is at the bottom, it could bump along there for a while. "People want to be early so they don't miss out on a rally, but it may be two years before we see the earnings power to support any of these valuations," he says.
In other words, investors are buying on hunches rather than hard data. Laura Conigliaro, a managing director at Goldman, Sachs & Co., says tech spending, which has been flat for 18 months, isn't likely to climb this year. Next year could see a 7% rise, she says--hardly bull-market stuff. Says Cisco's Chambers: "CEOs will wait to spend until they see their own profits pick up."
Such pessimism holds sway across the high-tech landscape. Martin Pyykkonen, a network-equipment analyst at C.E. Unterberg, Towbin, notes that the seven biggest telecoms reduced their 2002 capital-expenditure forecasts by 25%. And in software, even tech-slump survivors like Siebel Systems Inc. (SEBL
) say a recovery this year is iffy, at best. "I think tech companies are late in the food chain," says Craig A. Conway, CEO of business-software maker PeopleSoft Inc. (PSFT
) in Pleasanton, Calif. "We are not in the position we were before." And it could be a while before they are again.
Corrections and Clarifications
``Tech CEOs aren't buying the buzz on the street,'' (News: Analysis & Commentary, May 27) should have said that the Nasdaq index increased 122.47 on May 8.
By Jim Kerstetter
With Susan Scherreik in New York and Ben Elgin and Cliff Edwards in San Mateo, Calif.