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Priceline. Cisco. Amazon. Back when dot-com stocks were crashing down around their ears earlier this decade, investors learned to fear names like these. Fortunes that had been made as those stocks rose to dizzying heights in the late 1990s and 2000 evaporated as some tech-stock prices plummeted by 80% or 90% in a matter of months. So today it's all the more surprising to find that as stocks once again stagger, this time in a sea of mortgage foreclosures and credit crunches, some of these same companies have been a relative safe harbor.
Tech stocks in general are still up for the year, and some big names have managed to keep their heads above water even during the past few wild weeks. Shares of Cisco Systems Inc. (CSCO
), the leading network-equipment provider, were trading 3.5% higher on Aug. 29 than they were on July 19, just before markets began their meltdown. Amazon.com, the e-tailing site, has seen its stock jump 104% this year and was nearly 8% higher over the past six weeks. Several other big techies are down, but not nearly as much as the overall market: IBM's (IBM
) shares have fallen 1% since July 19, but are still up nearly 18% this year.
Just as interesting, perhaps, is that the technology sector as a whole is proving to be much more stable this time around. By one measure, the stocks in the Standard & Poor's (MHP
) GSTI technology index , which focuses on blue chip technology stocks, were several times more susceptible to wild price swings in 2001 than they are today. In fact, those tech stocks have proven less volatile than a corresponding index for the financial-services industry.
To be sure, tech has hardly been unscathed in this summer's stock slam, and plenty of risks remain. Since the first of the year, the GSTI tech stocks are up 10%. That compares with a 9% drop for the financial stocks. But the GSTI and the NASDAQ index, which is heavily weighted toward tech and includes such bellwethers as Dell Inc. (DELL
) and Apple Inc. (AAPL
), are both down a bit more than 5% since a July 19 high. That's about the same as the Standard & Poor's 500-stock index's 5.8% drop and the Dow Jones industrial average's nearly 5.1% decline.
Investors look at tech much differently today than they did six years ago. Strong company results are far more rooted in reality than the breathless dot-com growth projections. Indeed, research firm Interactive Data Corp. (IDC
) expects spending on corporate information technology to rise 6.4% in the U.S. during the next 12 months. And phone carriers and cable companies are spending heavily in their battle for the digital consumer. "During the bubble, there was a lot of field-of-dreams building of [computer] networks," says Scott G. Kriens, chief executive of Juniper Networks Inc. (JNPR
), which makes networking gear. "Today, customers are all wide awake—and the demand is real.""MISSION-CRITICAL"Businesses also spent heavily in the period leading up to the dot-com crash, of course. But then demand was being driven largely by guesswork about how big the Net could become, and a fear of Y2K software glitches. With the turn of the millennium, reality set in and businesses rapidly scaled back spending. Experts say today's demand is being driven by a more fundamental need to handle the billions of bytes of data created by new Web, management, and telecom systems. "Certain areas like communications spending have become so mission-critical that it is harder to cut back there," says David B. Yoffie, senior associate dean at Harvard Business School.
Few tech companies have gone public in recent years, and a more skeptical market has helped ensure a higher overall quality of business plans for those that did. That helps explain why tech initial public offerings have averaged an 11% return vs. 8% for all IPOs, according to America's Growth Capital.
The biggest tech players, meanwhile, are moving rapidly to consolidate their positions in key markets. That's likely to continue fueling strategic acquisitions of smaller companies. And they are in a much better position to take advantage of fast-growing foreign markets. IBM (IBM
) posted 9% sales growth last quarter—its best since 2001—largely thanks to strength overseas. Cisco is also feasting on orders from places like Azerbaijan, Rwanda, and Saudi Arabia.ADVANTAGE INTERNETConsumers are providing some of the fastest-growing markets for tech, but those would be the most vulnerable to a downturn. Overall, Web commerce is growing more than 25% a year, and investors are finally coming to realize that the scale of the big e-commerce companies such as Amazon.com and eBay Inc. (EBAY
) means they have a sustainable advantage over physical-world rivals.
As more U.S. consumers worry about whether they can pay their mortgages, logic says they will eventually cut back on new iPhones, big-screen TVs, and shopping in general. There's no sign of that happening yet. Hewlett-Packard Co. (HPQ
) reported on Aug. 16 that profits from PC sales jumped 29% in the third quarter from the previous year. The same day, HPCEO Mark V. Hurd told analysts he had "no data to indicate any material change in demand in any segment of any market."
In fact, the sector that's being punished the most by Wall Street is high-growth Web companies. Investors fear they will suffer from fewer mortgage and financial ads; financial-services ads were the second-largest category of online ad spending in 2006, according to the Interactive Advertising Bureau. Google Inc.'s (GOOG
) stock has fallen 6.5% since mid-July; Yahoo! Inc. (YHOO
) is down about 13%.
But don't count out the Webbies just yet. It's also possible that as companies scrimp, they'll just shift even more of their ad dollars away from print and TV, and into cheaper Net ads. By Catherine Holahan, with Peter Burrows and Robert D. Hof in San Mateo, Calif., and Spencer E. Ante in New York