Wall Street stays bullish on tech stocks

Electronic News, Feb 9, 1998 by Cindi Maciolek

Palo Alto, Calif.--In spite of the recent volatility in the stock market, many West Coast analysts remain bullish on high-tech stocks.

"We're excited about long-term growth for tech stocks," said Frank Quattrone of Deutsche Morgan Grenfell Technology Group. "It's one of the few places investors can get consistent double-digit returns on capital and outperform most indices, if they choose the right companies. There are nearly 1,000 publicly traded tech companies, with about 100 firms going public annually.

"The sector trades about 8 billion shares a month. It's become a very liquid marketplace where institutions are becoming more comfortable taking the risk," Mr. Quattrone said.

According to Jay Hoag of Technology Crossover Ventures, people are driven to technology as an investment area because price/performance gains are the best in electronics. "Companies use technology for more than just cost cutting," said Mr. Hoag. "Technology allows them to gain a competitive advantage and they can rapidly scale their business."

"Tech funds definitely underperformed in 1996 and 1997," said Roger McNamee of Integral Capital Partners. "But there's a silver lining in this. There are more bargains in tech stocks than in any other area of the market. Silicon Valley is changing the way the world works, so there's still a lot of growth to come. There's nothing bigger than the whole PC communications thing. We're in the fifth year of a 20-year cycle for communications-centric computing."

Areas Analysts Like

Key growth areas for technology stocks include communications, connectivity, computers, biotech and semiconductor equipment manufacturing. "We anticipate growth worldwide in semiconductor equipment manufacturing," said Michael Murphy of the California Technology Stock Letter. "In spite of current economic conditions, Asian countries will find the money to update their equipment. The industry is driven by product cycles, the need for bigger wafers and smaller geometries. If they don't update their equipment, they'll be out of the semiconductor business, and we just don't see that happening," Mr. Murphy added.

Mr. Quattrone concurred. "In 1996, it seemed like there were going-out-of-business sales for semiconductor equipment companies. Now, the prices are much higher, and the stocks are being snatched up."

Biotech stocks are hot on everyone's list too. Baby boomers are fueling the need for drugs to fight diseases of aging, including cancer and heart disease. Over 100 drugs are expected to apply for FDA approval this year, providing ample growth opportunities for investors.

In spite of the optimistic outlook, the group identified some potential pitfalls that worry them. The Year 2000 issue, supply chain optimization, Microsoft's settlement with the government, and evolutionary changes for companies such as Oracle, Intel and Netscape are all trends these investment professionals are watching.

Asia-Watch Continues

The current economic situation in Asia was another big issue. Many analysts fear the Asian crisis is being underplayed by Wall Street. They expect the downturn to last up to eight quarters, with non-technology stocks hurt the most. However, Mr. Murphy anticipates the impact will take at least one full percentage point off technology stock growth.

Asia does present some opportunities in spite of the downturn. "The political and economic structures will be forced open by the IMF," said Mr. Murphy. "American companies will be able to go in and set up joint ventures easily. I don't think these currencies are coming back. Usually once they go down, they stay down."

Among stocks some of the high-tech specialists like for 1998 are: Adaptec, Altera, Amazon.com, Applied Materials, Chiron, Cisco Systems, Cnet, Dell, e-trade, IDT, Intel, LSI Logic, Mattson, PeopleSoft, Xilinx and Zoma.