To discuss the battered stocks in the high-tech sector, Business Week's guests on July 28 were Vadim Zlotnikov, senior research analyst at Sanford C. Bernstein & Co. in New York, an expert watcher of tech stocks, and Ira Sager, BW's computers editor, who wrote "Don't Log Off High Tech Just Yet" as part of the July 29 BW cover package on the stock market.
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OnlineHost: Welcome to Business Week Online! Tonight we talk about investing in high tech, which has been battered recently but still shows great promise. Our guests: Vadim Zlotnikov (ZVadim) of Sanford C. Bernstein & Co. in New York, an analyst of technology stocks, and Ira Sager (Isager), who is computers editor of Business Week and author of a story on these stocks in the July 29 BW.
JackBW: Good evening to all of you on AOL. Welcome to BW Online, Vadim Zlotnikov. I'm Jack Dierdorff, your moderator for tonight, from BW Online. Hi, Ira Sager.
Isager: Hi, Jack.
JackBW: Ira, the July 29 issue of BW carried your story, "Don't Log Off High Tech Just Yet." What was your conclusion?
JackBW: Guess the headline said it -- but why?
Isager: Well, there is still a lot of strength in technology stocks. Demand is strong in a lot of sectors, and, for most of the leading companies, they look well positioned for the second half of the year. Vadim, would you agree with that view?
ZVadim: In general, I agree, but you can't generalize too much. Last year you could have been lucky, this year one has to be smart, next year it has to be both.
JackBW: Walmarc in the AOL audience asks this.
Question: Why did Wall Street reward IBM when it is having severe problems with its machines at the Olympics and spent a lot of money for advertising at the Olympics?
Isager: First of all, IBM sent a strong message to analysts the second half is looking good. They also made it clear that they're signing lots of deals similar to the Olympics, and I think analysts see that the contracts are still flowing, so they're not concerned -- yet.
JackBW: Here's one for Vadim Zlotnikov of Sanford Bernstein.
Question: What computer stocks do you view as core holdings or blue chips?
ZVadim: I would pick one stock from each of the major subsectors of technology -- in semiconductors Intel, in networking Cisco, in software Microsoft, in services EDS, in distribution Arrow. These vendors are currently shaping the nature of competition in the industry.
Isager: Vadim, any reason you left off personal computers from that list?
ZVadim: None. I would pick both Compaq and Dell. However, PC stocks tend to be much more volatile, due to shorter product cycles and changing business models. In many ways, Intel is the best play on PCs.
JackBW: The answer to this could be helpful to lots of investors, Vadim.
Question: What criteria do you use to value computer or tech stocks?
ZVadim: This is a great question! It turns out that a single criterion is not applicable across the entire universe of stocks. In the case of semiconductors, which tend to be cyclical, I would use a combination of price/sales and P/E. In the case of software and networking stocks, there are very few valuation metrics that work -- i.e., by the time the stock looks cheap, it may be too late. The technology stocks that trade on the basis of traditional valuation metrics include service companies and distributors -- they tend to be more stable and amenable to analysis. Because momentum and product cycles play a great role in determining the stock prices, you should not rely on valuation alone, except for initial screening.
JackBW: Gordiss in Salem, Ore., asks about a different sector -- maybe coming to a screen near you.
Question: Who are the important companies in digital video?
ZVadim: It is still too early to determine the winners. However, there are several ways that investors can participate in the digital video trend: C-Cube, LSI, and SGS-Thomson are important for decoder and encoder semiconductors; Intel is providing both software and hardware capabilities; Thomson, Philips, and several other systems companies are working on the hardware, while traditional cable companies, Scientific Atlanta, and General Instruments are involved with the transmission equipment and service.
JackBW: Next, from BobAB in Oklahoma, a timing question.
Question: So, Mr. Zlotnikov, suddenly the high-tech stocks look like chopped liver. What's your advice on investing in them in the short term?
ZVadim: In the near term, most of the negative news regarding the third quarter has been reflected in the stock prices; there is probably a modest amount of upside as investors look forward to a strong fourth quarter. However, I would suggest staying with quality companies, which would continue to have good fundamentals, even if the demand slows. This is not the time to experiment with "concept" or "story" stocks!
JackBW: TSEMF sent this question in advance -- for which, thanks. You can do this, too, next time.
Question: Tower Semiconductors shot up last week. Since it's one of relatively few "foundries" in the business, it should benefit if semiconductor demand returns. Is this the time to jump in?
ZVadim: Tower has contracts with a few very good companies, which should provide some stability. However, it is far from being the only foundry. In fact, the greatest overcapacity in Taiwan comes from companies that act as foundries to "fabless" semiconductor design houses. Overall, I would not be jumping in here; it seems too risky.
Isager: Looking short term again, are there any sectors of the business looking particularly good for investors?
ZVadim: Absolutely. Networking growth remains very strong; PC sales are continuing to grow at 18% to 20%, and some of the software companies have not experienced any slowdown. For example, companies like Computer Associates, Cisco, Compaq are continuing to beat expectations and should do well for the next few quarters. Semiconductor demand remains very strong, but there are some near-term problems with overcapacity, which should be gone by mid-'97.
JackBW: JDNeil in the "Northeast USA" asks about a giant we haven't mentioned yet.
Question: Any thoughts on DEC reporting this week?
ZVadim: The company has already pre-released some of the difficulties it is having in its PC business -- that will not be a surprise. The transition to Alpha microprocessor is going well. It may still take them a couple of quarters to fix the PC business.
JackBW: Now, from a bargain hunter.
Question: What are some undervalued tech stocks?
ZVadim: Bargain-hunting among tech stocks is for those with courage. Among the high-risk/high-return stocks, I would suggest Applied Materials, Lam Research, Novellus, Texas Instruments, National Semiconductors. Those with lower risk include Avnet, Arrow, EDS, maybe even Seagate.
JackBW: PSLT1156 turns in this question about another much-discussed name.
Question: I would like to know your opinion of Micron Techologies. Should I buy now?
ZVadim: Good company in a very difficult environment. There is a modest near-term upside, but probably not worth the risk of DRAM glut continuing through the middle of 1997; I would wait until about the first quarter of 1997.
JackBW: Rhodium1 has the next question.
Question: Being that VLSI is a specialty semiconductor maker, are its prospects any better than those of other semiconductor stocks?
ZVadim: In general, yes, but VLSI is facing increasing competition from Japanese suppliers who are anxious to convert DRAM capacity into ASICs. Given today's stock price, it may be worth buying for the next three months.
JackBW: And now Walmarc brings us to the Big MS.
Question: What is the future of Microsoft? Will its earnings get hit because of piracy in Asia and a high dollar?
ZVadim: Microsoft is spending a substantial amount of money on battling the piracy. Even if this prevents only 10% to 20% of the software from being pirated, it will actually be incremental to earnings -- i.e., they don't lose the money that they are not currently collecting. The strong dollar will hurt. However, the strong product cycles should sustain earnings growth for the next few years.
JackBW: A question about another big name -- an embattled one at that -- from Dancgnanc.
Question: What is your opinion on Apple computers as a buy?
ZVadim: Apple's installed base of 15 million users is a significant asset. Consequently, Apple should be able to leverage that asset, to return to profitability in the next six to nine months. The stock is already trading on these expectations! To buy now, we would need to see a more complete strategy and financial model -- hold for now.
JackBW: A broader question now, from BBartlett.
Question: Is this just a multiple correction going on? It seems like the use of technology is not going to slow down, so if you are in the right issues, one can make money.
Isager: Long-term, yes.
ZVadim: Yes, multiple contraction is one of the issues. However, some companies have unsustainably high profitability; I would avoid those. In the long term, I agree with Ira.
JackBW: MissDior asks a basic question.
Question: Which companies have the greatest fundamental strength?
ZVadim: Cisco, Intel, Microsoft.
JackBW: NYRBL is up next.
Question: Can you give me your opinion on Iomega? This stock has been destroyed, but the fundamentals appear to be quite sound.
ZVadim: I am not up on the latest competitive developments, but from the valuation point it is starting to look attractive.
Isager: The stock has near-cult status among some investors, but it has a big hurdle to overcome in the future. And that's making its storage devices as common as floppies. That has yet to happen. PC makers are offering the units on some models, but not all.
JackBW: Zoneq has an intriguing question, on Apple again.
Question: Do you feel that Apple Computer will be bought by the Japanese in their play for the computer market?
ZVadim: No. If they want to use MacOS, they can license it (e.g., Bandai has done so), no need to buy.
JackBW: Now, from GraceAC in Virginia.
Question: How stable do you feel the interactive services (Internet service providers, AOL, etc.) are? Will these companies hold up with cable providers and RBOCs [regional Bell operating companies] entering the picture?
ZVadim: Great question!
JackBW: Good question on AOL.
ZVadim: In the near term, they have some competitive advantages from software and installed base. Longer-term, it will be difficult to maintain the same level of profitability and growth. They will need to evolve the business model, which is always high-risk.
JackBW: SASZU wants to capitalize on the spread of intranets.
Question: What are some good intranet stocks?
ZVadim: Sun Microsystems, Cisco, Cabletron, Newbridge Net, Microsoft. There are many others, but they tend to be smaller and riskier.
Isager: Intranets will be purchased by major companies, and, I think, they will tend to go with their current suppliers, such as Sun, Netscape, Microsoft, Cisco, etc.
JackBW: JimJim8163 brings up a hot name we've somehow neglected.
Question: How do you feel about Netscape? The "correction" as viewed by most analysts was about companies with valuations that were too high. Do you feel Netscape is one of those companies or is it a blue chip?
ZVadim: Netscape, to be successful, must roll out products faster and better than Microsoft. It has an advantage of a very large installed base of sites and clients, which use their browsers. However, with Microsoft beginning to incorporate more of the functionality into the basic Office application suites and Windows OSs, It will be very difficult for Netscape to win.
JackBW: We're on overtime now -- so that's a wrap for tonight. Thanks to all of you on AOL for your deluge of questions. Sorry we couldn't use more. Thanks, Vadim Zlotnikov of Sanford C. Bernstein for joining us and sharing your wisdom on investing in technology stocks. It looks as if there's hope! Thanks, Ira Sager of BW, for your help.
Transcripts of this and all BW Online conferences are available soon after the event. Look under Talk & Conferences on the BW Online opening screen. Thanks again, and goodnight all!
Copyright 1996 by The McGraw-Hill Companies, Inc. All rights reserved.
