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Behind the Technology Plunge

Wall Street: Analysts say sell-off is partly a continuation of a correction in stock valuations and a reflection of forecasting difficulties. Many O.C. firms lost value in the sudden downturn.


SAN FRANCISCO — As technology shares plummeted Thursday in the wake of bad earnings news from industry superstars Hewlett-Packard and Motorola, investors and executives were struggling to determine whether the sell-off was merely a panicky overreaction by fickle investors or an indication of serious problems in the business.

The answer, confusing as it may seem, is neither.

In part, analysts say, the market activity was a continuation of corrections in technology stock valuations that began last fall, paused in the spring and then resumed. Until now, blue-chip companies had largely escaped the carnage, but the poor earnings announced by Motorola on Tuesday, coupled with HP's warning of a disappointment on Wednesday, dramatically broadened the scope of the tech retreat.

Many of Orange County's high-tech companies were among those jolted by the sudden downturn.

Five technology stocks in Orange County lost more than 10% of their value in trading Thursday.

MTI Technology, an Anaheim maker of computer storage systems, was the biggest loser among Orange County stocks that closed the day at $2 or greater. The company's stock fell nearly 16% to $2 per share. Odetics, an Anaheim company that makes data storage systems and robotics, watched its stock slump 13% to $13 per share.

The sell-off also reflected the extreme difficulty of forecasting product sales and pricing levels in an incredibly fast-changing industry. In the all-important personal computer sector, for example, year-over-year growth is expected to be 19% this year, according to Dataquest. That's more than healthy by most measures--but a disaster if you're a parts supplier and had planned on the 40% growth rate of last year.

The rise of the Internet, while creating an appetite for many types of technology products, has also changed buying patterns in unpredictable ways. "The technology industry has always been about creative destruction," notes David Shulman, director of investment strategies at Salomon Bros.

Computer chip companies, which must make multibillion-dollar capital investment decisions based on guesses about demand 18 months down the road, are the biggest victims of the industry's uncertainties.

Just a year ago, chip executives were arguing that low inventories, better market research and a more diversified customer base had finally ended the notorious boom-and-bust cycles of the chip business. They thus forged ahead with ambitious construction plans--and sure enough, a huge amount of new capacity came online just as the PC business, the biggest chip consumer, was beginning to slow down.

Today, a 4-megabyte DRAM chip--the memory chip most widely used in PCs--goes for $5, less than half the $13 it sold for in December. Dataquest says the chip equipment industry, which grew 77% to $19 billion in sales last year, will grow a meager 17% this year and will actually decline by 16% in 1997--though of course those forecasts are probably no more reliable than last year's.

Motorola is being hurt by the fall in chip prices and also by the weakness of Apple Computer, the main customer for Motorola's PowerPC microprocessor. But its wireless telephone operations are also in a slump.

That's in part because there is more competition in a market that Motorola once had virtually to itself. But hard-to-read technology cycles have played a part here too: Motorola is stronger in older, analog mobile phones, analysts say, and the growth markets today are in digital phones and switching systems.

Hewlett-Packard, in its warning, said it was seeing weakness all across its very diverse product line, adding to fears that a broad-based slump has arrived. But HP has been enjoying double-digit growth that's almost unprecedented for such a large company and may simply have missed a beat or two in its product planning. And its shares, which closed at $78.375 in New York Stock Exchange trading Thursday, down $10.625, are still at twice the level of two years ago.

That said, many observers remain uncertain about PC growth in particular. A two-year boom in home computer sales has clearly slowed, and even though consumers can now find tremendous bargains--a PC that's all but state-of-the-art now costs less than $2,000--many believe it will take a new type of radically cheaper PC to attract the 60% of households that still don't have one.

PC vendors have been hoping the corporate customers, after spending the last several years digesting their 486s and first-generation Pentium machines, are ready to start buying again. But the Internet has created so many new hardware and software options that some customers may wait, and some may buy the unexpected.

Richard Zwetchkenbaum, a research director at International Data Corp., gives the PC companies credit for coping as well as they have. "The PC companies have shown an incredible ability to adapt to the changing dynamics of their market, unlike the big systems companies of yesteryear," he says.

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