With the market shaky, it's one of the more stable
bets around
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 INTERNET
Consumers 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