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Will Flattened Technology Stocks Ever Recover Their Bounce?

Wall Street: Prospects appear grim for smaller, loss-ridden Internet, computer and telecom stocks if investors stay focused on proven, profitable firms.

March 22, 2001|JAMES F. PELTZ | TIMES STAFF WRITER

Everyone's trying to guess when the massacre in technology stocks will finally bottom out. But for many of these stocks, it's now a question of whether they can ever bounce back.

These are stocks of mostly young, still-unprofitable firms providing Internet, telecom and computer-networking products and services. And they've been beaten to a pulp by investors ever since the tech stock craze peaked in March 2000.

A year ago these stocks were frenetically bid up by investors who were enthralled by the dot-com craze and ignored the fact that many of the companies were untested and bleeding red ink.

Then came the worst blood bath in Nasdaq history. The Nasdaq market has plummeted 64% in just 12 months, and investors have seen an incredible $3.5 trillion in paper wealth go up in smoke. That sum is what the entire stock market was worth only a decade ago, according to Ned Davis Research in Venice, Fla.

"The stock market reacts a lot like a child would--it runs from the risk," said Cary Robinson, an analyst with US Bancorp Piper Jaffray. "You run to the safety of companies that have earnings today," he said. If investors stay focused on proven, profitable companies, then fledgling Internet and tech stocks won't come back in 2001, and maybe never, he said.

Many of these once-highflying stocks became members of the Nasdaq 100 index, which measures stocks with the biggest total market values on Nasdaq. The index itself--along with its broader cousin, the 4,600-stock Nasdaq composite index--became the hip barometers of the emerging "new economy," overshadowing the staid Dow Jones industrial average.

Not long ago, companies with names many people had never heard, such as Level 3 Communications, RealNetworks, Exodus Communications and CMGI, were must-have stocks for a new wave of investors and were worth billions on the stock market. Today, these companies are worth dimes on the dollar and might decline more.

The now tarred Nasdaq 100 index represents a wide swath of the new economy: Besides established stars such as Microsoft, Intel, Cisco Systems and Oracle, it includes Yahoo, the most popular Web site; Amazon.com, the pioneer Internet retailer; and Palm, maker of hand-held electronic organizers. And the group contains dozens of others involved in brave new worlds of fiber optics, broadband chips, Web site hosting and streaming video on the Internet.

Most analysts expect the tech sector's blue chips, such as computer-networking behemoth Cisco and chip giant Intel, to recover in tandem with the economy. But the prospects are starting to look grim for those smaller, loss-ridden companies on the Nasdaq 100.

One such cautious investment pro is Larry Puglia, manager of T. Rowe Price's Blue Chip Growth Fund, which has $6.3 billion in assets. "We would have significant concerns about their ability to thrive over time," he said of the weaker firms on the Nasdaq 100.

As an example, he noted that his fund doesn't own any Yahoo shares, which despite its lofty status on the Web has suffered sharply slowing growth because of a slowdown in Web ads. As a result, Yahoo's price has plummeted to $13.69 a share on Wednesday from $191.75 a year ago.

Analyst Robinson, who follows Level 3 and Exodus Communications, among others, still expects the need for those companies' services to keep expanding. Level 3 carries voice and data over its fiber-optic network, and Exodus provides Web hosting services for companies ranging from British Airways to Weather.com.

But Robinson also knows that with Level 3 and Exodus unprofitable, their stocks still are risky even though both have plunged from their peaks of a year ago. Level 3's stock has dropped to $15.50 a share Wednesday from $129, and Exodus has fallen to $9.84 a share from $90, wiping out about $40 billion from each of the companies' total market values.

Many stocks with flagging prospects are involved with the Internet, for which investors now have little patience after seeing supposedly strong players such as Yahoo run into big problems.

They include CNET Networks, a San Francisco-based Internet media provider; BroadVision, an Internet services supplier; and Inktomi, a software maker that speeds traffic on Web sites. All those stocks have plummeted 80% or more over the last year. "We think the Internet will grow just fine," said Puglia of T. Rowe Price. As for companies that are "depending upon the growth of certain aspects of the Internet, we're not convinced that those companies can generate sustained growth."

CMGI is a good example. The Boston-area company, which holds major stakes in Internet search engine AltaVista and more than a dozen other Net firms, has seen its stock plunge an eye-popping 98% over the last year. Yet investors still don't see CMGI as a bargain because the company's long-term outlook remains so iffy.

RealNetworks in Seattle, a provider of software and services for creating and playing back music and other content on the Internet, is at least profitable. But its stock keeps getting punished because, despite plummeting 94% from its record high of $96 a share, it's perceived by many as still pricey.

Why? Even at its current price of $5.78 a share, RealNetworks trades for an astonishing 96 times expected 2001 earnings per share.

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