A 1980s history lesson for the tech sector

If you're a tech investor, it may be a good idea to brush up on some history from the 1980s--which witnessed tech stocks founder for about five years from 1984 to 1989.
Written by Larry Dignan, Contributor
If you're a tech investor, it may be a good idea to brush up on some history from the 1980s.

No, not the Atari, big hair, Flock of Seagulls and Ronald Reagan version of the 1980s. The 1980s that witnessed tech stocks founder for about five years from 1984 to 1989.

An increasing number of market strategists are looking back to the 1980s to get a read on the current environment for tech stocks. The theory is that the tech sector is currently in a transition period not much different than that of the mid-1980s, when an initial-public-offering boom turned to bust, venture capital dried up, and companies that used to be leaders became laggards.

"Although no two time periods are exactly alike, we do think the similarities are too great to ignore," Steven Milunovich, a Merrill Lynch tech strategist, said on a conference call last week.

According to Milunovich, the tech sector runs in 10- to 15-year waves. At the start of each wave, the sector undergoes a major transition. In the 1980s, it was the switch from mainframes to PCs. Today, it's the switch from PCs to the Internet and network computing.

The catch is that these transitions don't happen overnight, and new companies normally supplant old tech leaders, he said. In the 1980s, big tech names such as Honeywell and Control Data gave way to Intel and Microsoft. Who's next?

"Today that question has to be asked of PC leaders such as Intel and Microsoft," said Milunovich, who highlighted Ciena and BEA Systems as companies that could become leaders.

When there's a transition between waves, tech stocks trade flat, said Milunovich, who argued that the sector will run in place for the foreseeable future just like it did in the '80s.

A comparison of the two periods lends credence to Milunovich's theory. There was an IPO boom in 1982 and 1983, where PC and disk drive companies became Wall Street favorites. The boom became a bust after the euphoria led to a glut and price competition.

Tad LaFountain, an analyst at Needham, remembers a 1984 Intel analyst meeting where then-CEO Andy Grove noted that there were 20 PC makers all angling for 20 percent market share. "You can do that math all day and see it wouldn't work," he said.

Indeed, many PC clone makers and disk drive companies disappeared.

Fast-forward to 1999 and early 2000, and you find communications and dot-com companies disappearing. A boom encouraged too many players to enter the Internet fray.

Meanwhile, in 1984 analysts were too optimistic about five-year growth rates, Milunovich said. Merrill Lynch found analysts were projecting large tech companies to grow about 18 percent from 1984 to 1989. Instead, those companies grew 10 percent. "Today, analysts are looking for over 20 percent, and we think that's likely to be too optimistic," he said.

Simply put, the tech sector may take awhile to work out its kinks, analysts said.

The good news? Milunovich said the tech sector is at least close to a bottom--but stocks aren't going to bounce back quickly.

LaFountain, among the few current Wall Street analysts who were around in the '80s, acknowledges the comparisons, but said the present tech downturn may be a bit different. In the 1980s, chipmakers were ravaged by competition from Japan, and there was a major market crash in 1987. Meanwhile, the current era of the network is fundamentally different from the PC era and has its own quirks.

"Nothing would make it easier than to say that we've been through this before, and here's what's going to happen," LaFountain said. "But this is different. We're moving to a mature market."

To LaFountain, the last 20 years has highlighted a natural progression, but now that evolution has largely played out. It's not the end of technology, but the end of the beginning. "Since 1981, we've built a bunch of PCs and then connected them," he said. "What's next?"

Analysts said the tech sector's biggest handicap is that there's no "killer app"--a new product that fuels demand. Wireless isn't ready for prime time, fiber optics is overbuilt, technology in general isn't easy enough for the masses to use, and broadband is stuck in a bottleneck. "The industry hasn't identified the next killer app," Milunovich said.

In the 1980s, office automation and Lotus 1-2-3 sparked a boom. In the 1990s Netscape's browser changed the game.

LaFountain said killer apps can occur only when something is completely new. For now, the tech sector is busy making incremental improvements.

But technology always serves up something new--even if the next big thing isn't identified yet. "Digital watches, CB radio, PCs--there's always something," LaFountain said.

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