Red-hot tech stocks cooling down

THE BALTIMORE SUN

NEW YORK -- The high-tech rally of 1995 may be running out of steam.

While several big computer-related companies, including Microsoft Corp. and International Business Machines Corp., reported robust second-quarter profit increases, their stocks dropped as some executives warned that the torrid rate of growth might not be sustainable.

Shares of computer chip leader Intel Corp. also fell, even though the company reported record second-quarter revenue after the close of New York trading.

Analysts attributed yesterday's broad stock market decline to the influence of stumbling technology shares, which have led the market higher this year. Several also worried that any failure by technology stocks to continue upward could spell the end of the four-year-old bull market.

Stock prices reflect the belief that the technology industry "is going to be everywhere, including in the huts of peasants in China," said Marc Perkins, president of Perkins Capital Advisors, a Boca Raton, Fla., money management firm. "That's not going to happen."

Even usually upbeat executives were doing all they could to rein in analysts' expectations. "I would be reluctant to put a highly rosy view on the outlook," said Jerome York, chief financial officer of IBM. The world's biggest computer maker said demand may be slowing and price pressures increasing in the United States.

IBM stock dropped as much as $4.375, or about 2 percent, before rebounding, after the company reported second-quarter earnings more than doubled, beating Wall Street's most optimistic forecasts. The shares closed down 25 cents at $107.

Microsoft stock plunged $7.125, or 6.5 percent, after the company warned analysts that it, too, may slow down in 1996. The stock was the most active in U.S. equity markets.

Intel fell $3.1875, to $73.25. The stock was the second-most active.

Microsoft sent a signal that its earnings may not rise as quickly in the second half of the year as it did in the first, analysts said. The warning caught some investors by surprise, who had been expecting phenomenal growth from Microsoft's long- awaited Windows 95 program.

Microsoft also told analysts it plans to defer as much as 40 percent of its Windows 95 revenue until fiscal 1997.

The company also will defer as much as 60 percent of the fiscal first-half 1996 revenue from its Microsoft Office software, and give users free upgrades during that time.

Those moves are a bid to spread out growth over the next couple of years, said Stephen McClellan, a Merrill Lynch & Co. analyst.

The dose of gloomy news cooled a red-hot technology stock group -- which for some investors is the stock market's new bellwether.

Analysts said part of the reason technology stocks have been poised for a fall is because earnings haven't quite kept pace with the stock increases. While IBM's earnings have almost tripled in the first half, Microsoft's net income for the fiscal year ended June 30 rose only 23 percent.

"The rally has been a bit ridiculous," said Mr. Perkins, who manages more than $100 million. "You had stocks trading at 100 times earnings or 25 times revenue. Nothing goes up forever."

Charles Morris, who manages the $1.9 billion Science and Technology stock fund at T. Rowe Price, told clients yesterday that the tech market is poised for a fall.

"IBM and Microsoft aren't weaker companies today then they were yesterday," said Anthony Gray, chief investment officer at SunBank Capital Management in Orlando, Fla. "It's just that these stocks were trading as if the sky was the limit, and now there is a token bit of contrary evidence."

To be sure, the outlook isn't exactly bleak for U.S. technology firms.

Texas Instruments Inc. said yesterday that second-quarter earnings jumped 51 percent, beating analysts' expectations, as strong demand for computer chips increased sales. The Dallas-based chip maker also raised its forecast for the worldwide computer chip market, predicting sales could grow more than 35 percent to $140 billion this year, up five percentage points from the company's earlier outlook.

"We had strong demand across the board for our chips," said Bill Aylesworth, Texas Instruments chief financial officer. "We expect demand in the market to continue through the year."

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