Software Survivors
Technology
continues to hold steady, but basically remains on life support for the time being. The positive aspect of tech right now is that at least it has stopped getting worse. There are even some areas that are improving, but wow,
what pain in the traditional telecom arena! Lucent
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recently sank to multi-year lows and have undermined the confidence of many
blue-chip tech investors. What was originally thought to be just a dot-com
meltdown that would wipe out the Internet excesses has morphed (thanks in large
part to Greenie and Co.) into a massive depression in the world’s telecom
sector.
Yes, these companies overbuilt
and overspent like mad, but their big mistake was to do so with debt just when
the Fed decided to knock out the “bubble†with a far-too-aggressive
ratcheting of rates through May of 2000. Since the telco boom was so highly
leveraged, the higher rates torpedoed the broadband revolution before it was
finished. So here we are, almost a year-and-a-half after “the peak,†still
mostly using dial-up networking, Ã la AOL, and still watching a bear-mauled
technology group trying to find its way.
The GDP number today showing an
anemic 0.7% growth rate only adds to tech investor’s frustration levels, as it
becomes clear that the “recovery†in tech is going to take a long time.
While the pain in telecom has zapped almost every tech product maker in the food
chain, there are a few areas that are looking attractive.
What I have been keeping an eye
out for are companies that have avoided a collapse in earnings and that are not
reliant upon a rapid rebound in the fallen telco sector. One area of tech that
has been fairly resilient and has exhibited decent price action since the spring
lows has been software. Of course the first name that comes to mind is
Microsoft, but beyond the software king are both Adobe Systems
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PeopleSoft
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Adobe Systems is best known for
its leadership in desktop publishing graphics software as well as its popular
Acrobat PDF (portable document format) file software that allows simple
transmission of documents on the Internet. The company’s graphic design,
imaging, dynamic media and authoring tools enable customers to create, manage
and deliver Internet content. Headquartered in San Jose, Calif., Adobe is the
second-largest PC software company in the U.S., with annual revenues exceeding
$1.2 billion.
The company had avoided much of
the tech meltdown in the spring of 2000, but ended up throwing in the towel
during the first quarter of 2001 along with most of the tech giants like Cisco
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Sun Micro
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but it really can’t be lumped into the same category as the network and telco
disasters since it doesn’t depend on selling its products to the Nortels or
Lucents of the world.
Adobe has staged a decent
rebound from its March 2000 lows and has remained in a trading range for the
past four months. The stock has done a nice job not losing contact with its
50-day moving average and could be poised for solid gains if it can break out of
this range and retake its 200-day moving average.
In June, Adobe posted quarterly
earnings of 34 cents per share, handily beating analysts’ estimates of 29 cents
per share. Its next earnings report due out is set for September 14, and
analysts expect the company to post 28-cent-per-share earnings. With a fairly
low PE of 37 and a market cap of $10.4 billion, Adobe is one tech that didn’t
get completely wrecked, and like PeopleSoft, is one to keep an eye on when tech
shifts back into overdrive.
PeopleSoft is the other
software name that has been impressive of late. The company makes human resource
software for businesses and recently posted earnings of 14 cents per share,
topping analysts’ estimates of 12 cents per share. Its second-quarter earnings
were $46 million vs. the same year-ago earnings of $16 million. That’s
impressive given the collapse in tech spending we have seen. But like Adobe,
PeopleSoft is a tech not dependent on hardware spending.
After hitting an all-time high
in early 1998, PeopleSoft pulled back through mid-2000. It battled back near
those highs in early 2001, but sank along with the rest of tech before bottoming
in March of this year. Again, like ADBE, it has staged a nice comeback and has
managed to rise back above its upward-sloping 200-day moving average after a
brief and sharp pullback this month.
PeopleSoft is currently
positioned slightly below its 50-day moving average, and with its solid earnings
growth and lack of reliance on telco purchasing, it looks promising if and when
the broader tech market finally gets off life support. The company has a market
cap of 12.3 billion and a PE of 66.
Have a great weekend!