Digging Through The Rubble
Remember about this time last year when
the outlook for technology stocks couldn’t have been brighter? Greenspan was
raising rates and attempting to jawbone stocks lower, but few cared because the
“New Economy” promised to wash away all that old-fashioned thinking
the Fed Chair espoused. The Internet was King and the whole technological
revolution it was ushering in would change all the rules forever. This time it
was different. Wall Street was making millions taking ridiculous ideas public
while traditional value players like Julian Robertson were ridiculed. Harvard
MBAs were dropping out of school to join the gold rush, and the financial press
was more than happy to add fuel to the fire by hyping stocks and giving any new CEO
a soapbox. Boy, was it fun.
There were days when dozens, yes dozens of tech names were all
up 10, 20, or even 50 dollars a day on any particular day. It was “Masters of
The Universe” time for tech investors and traders as the Nasdaq soared to record
after record. Investors had become so accustomed to “V” bottom
sell-offs, that when the first cracks appeared in the dam in March, it seemed
like the inevitable bounce would quickly follow. Little did we know that tech
had begun its worst downturn since the ’73-’74 bear market that nearly halved
Dow over two years. Back then, many stocks never recovered, and today, many are
already being closed down or de-listed.
So what happens in tech now? Is it gone forever, and should we go back to
index mutual funds and Treasuries where it’s safe? Looking at the tech
landscape, I feel like I have been dropped into some sort of war zone.
Everything was destroyed. Everything. You could always count on the tech giants
to bounce, but this time it really was “different.” Microsoft, Intel,
Sun, and even the ever-trustworthy Cisco were annihilated. Forget about the Net
stocks, the hardest part of this past year was seeing Cisco drawn and quartered. It was like
seeing John Chambers on a platter with an apple in his mouth!
In time, this period will become more understandable, but being a hard-core
tech follower through this past year was tough. Very little made sense, and
those ever-dependable “V” bounces were non-existent. Personally, I think Greenspan
and the Fed saw a dangerous bubble forming and decided to take it out. Sure they
say they don’t target asset prices, but you can be sure that they were watching
the runaway tech bull market very, very closely. In fact, their pre-Y2K flooding
of the monetary system likely added yet more juice to the tech surge. I would bet that those Fed governors
watch CNBC all day long and even keep imaginary trading portfolios on Yahoo! The
mistake the Fed made was in not trusting the natural market forces to wipe out the
dot-com
mania.
By taking the hard line with the 50-basis-point-rate hike in May 2000 and not
cutting rates at their December 2000 meeting, the Fed spooked the market. Not
only did their actions wipe out the dot-com bubble, but they also wiped out the
legitimate techs like Cisco, Intel and Sun Micro, not to mention the flogging
of individual IRAs and investment accounts. The hard-line Fed rattled regular investors
pretty badly, and that loss of consumer and investor confidence could possibly turn this recession into a painful and
protracted one. Time will tell.
So What’s Next For Tech?
Given Friday’s action, it looks like tech will remain under pressure for some
time, but that shouldn’t stop you from looking out on the horizon for the the
next wave of innovation. We’re still in the early innings of the the broadband
revolution, so it will likely pay to keep your eye on what’s ahead in terms of
technological change. In this column, I will spotlight a variety of tech
companies that have an interesting business niche or appear to have a strategic
edge in an emerging technological area.
The goal is to look at a combination of fundamental and qualitative aspects
of these companies in order to find the emerging tech winners before they become
institutional darlings. The last couple of years saw the rise and subsequent
fall of portals, B2Cs, B2Bs, wireless, optical networkers, and most recently the
storage companies. Looking ahead in tech, voice recognition is a unique niche
worth tracking.
Voice Recognition
One area worth keeping an eye on in the coming year is the Internet and
telephone voice recognition sector. Imagine if you could just ask a question to
a wireless hand-held device or make a phone call and actually have all the
information on the Internet available to answer your question. As this
technology advances, you will eventually be able to access a speech-activated
browser that will give you the verbal equivalent of a Yahoo! search engine.
Two companies that fit into this category are Nuance Communications
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and SpeechWorks
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was well under way, so neither really had the chance to soar to the outer orbit
valuations like so many Net-related stocks did prior to the Nasdaq March 10,
2000 peak.
Nuance
Nuance Communications went public last April and traded as high as 182 in
August before throwing in the towel with the rest of tech in the last few
months. Menlo Park, Calif.-based Nuance makes voice interface software that is
currently being used by companies like Merrill Lynch, Lycos, Nomura Securities
and Sprint PCS. International Data Corp estimates that customer voice activated
software sales will grow from 1998’s $1.9 billion in sales to more than $16
billion in 2004.
Nuance’s current market cap is $1.18 billion and it counts Intel as an owner
of 1.5% of the company. Intel’s 1.5% stake represents 500,000 of the company’s
32 million shares. Nuance has $227 million in cash, and trailing 12-month sales
of 51.8 million. The company is not yet profitable, but it is positioned to
become a potential leader in voice recognition. Having closed Friday down 2 to
38 9/16, Nuance is less than 5 points above its IPO first day closing price of
33 15/16, and if you recall, April was a dismal time to launch an IPO.
SpeechWorks
SpeechWorks is a seven-year-old Boston-based company that makes speech
recognition software for building and enhancing customer relationships by phone.
With a current market cap of $742 million, SpeechWorks has $113 million in cash,
and trailing 12-month sales of $30 million, which was more than double the
company’s 1999 sales of $14 million. SpeechWorks is currently in a strategic
partnership with AT&T to develop enhanced software products.
SpeechWorks also boasts of a customer base that includes corporate giants
like AOL, Amtrak, Continental, E*Trade, FedEx, Fidelity Investments and Yahoo!
Interestingly, Intel owns more than 1,000,000 shares or 3% of SpeechWorks. For
any emerging tech company, its good to see that high-profile techs like Intel,
Cisco, or Microsoft have made investments in them. SpeechWorks closed Friday
down 2 1/8 to 24 15/16.
While the charts for Nuance and SpeechWorks hardly look inviting, they do
show a couple of potential longer-term “up-and-comers” that are
trading at what could prove attractive valuations. After all, there were times
in the past couple years where terms like B2B, opticals, and wireless were not
yet in the mainstream investment vocabulary. By finding the new leaders early
enough, the potential profit is all the greater. There are massive amounts of
tech rubble to sort through right now, and if you’re going to find the next gems
of tech before the rest of the Street, then the learning and searching process
starts now. Good luck in your tech search!