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Unplugging the Tech Sector

Investing: Intel's delay of its next- generation chip and deepening doldrums in Asia darken the stocks' outlook.

June 02, 1998|WALTER HAMILTON | TIMES STAFF WRITER

Another drop in technology bellwether Intel Corp.'s stock Monday sparked a sharp decline in tech shares in general and fed growing concern that the broad market has officially slipped into a "correction."

Intel shares sank $3.44, or 4.8%, to $68--their lowest closing price since April 16, 1997--following the company's announcement late Friday that it is delaying by six months the introduction of its next-generation microprocessor.

The stock market overall was pummeled by the tech sell-off and by fresh worries over Asia's economic debacle, dragging the Nasdaq composite index down 32.05 points, or 1.8%, to 1,746.82.

The blue-chip Dow Jones industrial average rose 22.42 points to 8,922.37, but losers far outnumbered winners on the New York Stock Exchange.

Intel's announcement further depressed its stock, which has fallen almost 20% in little more than two weeks on worries about pricing pressure, increased competition and a possible government antitrust investigation.

Intel's stock woes are a much more accurate reflection of the market's trend in recent weeks than the Dow index, which has fallen just 3.1% from its record high of 9,211.84 reached May 13.

The Nasdaq index, which includes such tech giants as Intel and Dell Computer as well as the vast majority of small stocks, now is off 8.9% from its record closing high of 1,917.61 on April 22.

"That certainly qualifies as a correction," said Hugh Johnson, chief investment officer at First Albany Corp.

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A correction is generally considered a short-term pullback of 5% to 15% in major market indexes.

The broad market is clearly in its worst shape since its deep sell-off last October, when the severity of Asia's financial crisis became clear.

U.S. stocks rebounded strongly early this year as Asia receded from the headlines. But share prices have fallen again over the last month, in part because of rising worries that East Asia's deep recession will further crimp U.S. corporate profits.

The government last week reported that overall profits fell in the first quarter, the second straight quarterly decline.

Most troubling to some investors is the fact that onetime market leaders such as Intel, Microsoft and Dell are stumbling.

Most analysts doubt that those companies and others such as Compaq Computer and Applied Materials have significant long-term problems. But most face weighty short-term questions and are unlikely to turn around in the next few months, analysts say.

"The bellwethers set the mood of the market, and the mood has gotten gloomier and gloomier," Johnson said.

That was evident Monday when Intel fell after putting off until mid-2000 the launch of its so-called Merced chip. Notably, the delay won't hurt the company's earnings. In fact, few analysts had included revenue from Merced sales in their profit projections.

Nevertheless, anything with a negative tone was enough to scare off investors who are already jittery over stepped-up competition for Intel from the likes of Advanced Micro Devices and over the industry's move toward lower-priced personal computers.

"I'm not sure it's Merced itself, but Merced as the straw that broke the camel's back," said Dave Simons, managing director of Digital Video Investments, an institutional research firm in New York.

Even if the stock stabilizes in the next few days, some investors think Intel will be "dead money" in the next few months.

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Intel's earnings and stock price in recent years have been fueled by the introduction of major new products such as the Pentium computer chip, said Kevin Landis, manager of the Firsthand Technology Leaders mutual fund. So any setback in the launch of a key chip probably will also delay a meaningful jump in the company's stock.

"If you own Intel and you're looking for that next leap forward, then they just announced that you're going to have to wait a little longer to get it," Landis said.

What happens to Intel's stock in the next few days may say a lot about its short-term fate. In the last year, its shares have rallied each time they have fallen to the $70 level. A further drop from its current $68 could indicate that Intel has broken that so-called support level, a bearish sign.

Microsoft, meanwhile, faces few of the competitive pressures bedeviling Intel, but it is embroiled in its own antitrust saga. Its well-publicized battle with the Justice Department has scared off investors who worry that the stock can't recover much until the antitrust cloud is lifted.

For many key tech stocks, the declines of recent months have been steep even considering the usual volatility of the group. But because tech has been one of the industries hardest hit by Asia's woes--as Asian orders for tech equipment dry up--some analysts say the sector's slump isn't surprising.

Indeed, the latest plunge may foreshadow a flurry of second-quarter earnings warnings from tech companies in coming weeks, some experts say.

What's more, many tech stocks had gigantic runs early in the year, so some investors now are antsy to lock in profits.

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