Nobody wants to think it, much less say it, but Tuesday's trading could be the first indication that investors have shed their infatuation with technology stocks despite the NASDAQ composite's continued growth.
On Tuesday, the NASDAQ tumbled 11.27 points to 1730.85 in afternoon trading despite stronger-than-expected earnings and revenues from Texas Instruments Inc. and the anticipation of typically strong numbers from Intel Corp. when it announces its quarterly earnings after the market closes.
So why are investors selling off their technology issues if key bellwether companies continue to thrive?
"Well, investors and analysts are always nervous, especially right before third-quarter numbers come out for the bellwethers," said Don Collier, president of ProLytix Corp., a Santa Barbara, Calif., stock tracker. "Actually, they're born nervous, but this time around there's more at stake."
Part of the problem, analysts said, is that technology companies are becoming victims of their own success. Posting 30-percent, year-over-year growth rates is an excruciatingly difficult pace to maintain. And while investors made tons of cash during this incredible period, the challenge of posting higher earnings in subsequent quarters becomes nearly impossible.
"There's no way any company can maintain that kind of growth," Collier said. "Even Intel, which owns its market and will for the foreseeable future, can't keep up the earnings growth that investors demand to keep pushing up the stock price."
Perhaps nothing illustrates this mentality more than Tuesday's stock prices. Texas Instruments' stock plummeted $5.19 per share to $135.81 after beating Wall Street estimates by 6 cents per share. In its third quarter, the chip maker reported profits of $239 million, or $1.20 per share, on sales of more than $2.5 billion.
Intel, which is expected to report a profit of about 91 cents per share this quarter, was down 81 cents per share to $91.75. Compaq Computer Corp., which predicted last month that it would surpass the $50 billion mark in annual revenue by the year 2000, was down $2.31 per share to $74.50. Even Microsoft Corp. wasn't immune to fickle investors as its stock slid back 63 cents per share to $136.13.
"This is alarming," said Charles Payne, an analyst at Wall Street Strategies. "[Investors] selling off these stocks do not believe that these techs can keep up the pace."
Analysts said the phenomenal growth of tech stocks in the past two or three years has been buoyed by "selective memories."
"Everyone wants to believe that the fundamentals of these markets has changed and that technology is driving that change, but some people are ignoring history," said Mona Eraiba, an analyst at Gruntal & Co. "But it's there staring us all right in the face."
In 1996, semiconductor stocks were up 80 percent from the prior year. Computer hardware makers rose 41 percent. Software companies soared up 36 percent. Each sector outstripped even the most optimistic expectations and made a mockery of the S&P 500.
But this isn't the first time technology shares have set the broader markets on fire.
Journey back to 1983 when the market got its first taste of technology mania. Remember Atari Corp., Eagle, Computervision, Commodore and IBM? They were the Intels, Compaqs and Microsofts of their day. Of them all, now only IBM remains.
A horrendous bull market in 1984 sent the NASDAQ spiraling down 30 percent. The reality was that the growth slowed abruptly and many companies that looked unstoppable suddenly became mortal. Between 1988 and 1990, in a recession, growth in computer sales fell from 26 percent to 10 percent. Fidelity's computer sector mutual fund went from $119 million in assets to $16 million virtually overnight.
By the time the 1983 crash bottomed out two years later, 12 out of 14 memory chip makers had shut down or left the business. Computer makers such as Osborn, Eagle, Mohawk Data Sciences and Visual Technology were gone. Apple Computer Inc. and Digital Equipment Corp. survived, but barely.
"There's no way anyone can pinpoint exactly when the next crash is coming, but when it does come, we're going to have a lot farther to fall," Collier said.
Indeed, in 1983 the Dow was hovering around 1000 and the NASDAQ was hardly a household market. Today, the NASDAQ is followed almost as closely as the Dow and both are trading at or near all-time records.
Bullish technology analysts contend that new technology, particularly Internet-related applications and services, will carry the market for years to come. That might be great news for companies such as Yahoo! Inc. or Amazon.com Inc., two infant firms which have established a solid foothold in the online world, but what about the PC makers and semiconductor manufacturers?
The PC market is a classic example. As more and more Japanese firms enter the market and American stalwarts such as Dell Computer Corp., Compaq and Gateway 2000 Inc. slug it out for market share, profit margins invariably drop. Lower margins equates, usually, to lower earnings. Lower earnings mean less investors. Stagnant stock prices, in turn, mean companies have less working capital for research and development, expansion and acquisitions.
Earlier this year, CompUSA Inc. said sales were up only 1.5 percent in its first quarter. Tandy Corp. closed its 17 Incredible Universe electronics stores, mainly because of sluggish PC demand. Wal-Mart Stores Inc. no longer sells PCs in 700 of its 1,600 stores.
"If you have PC sales slowing or even not growing at the rates they have, it will have a huge impact on all these markets," Collier said. "If PCs don't move, chips suffer. It goes on and on from there."