Decades ago, people accused Detroit carmakers of practicing "planned obsolescence," of intentionally making clunky cars that would soon wear out and force consumers back to the showroom. The vehicles indeed were short-lived, but their flaws had more to do with engineering problems than with any dark plan.
That doesn't mean speedy obsolescence isn't a good way to make money. Ask computer companies.
Two years ago a personal computer equipped with an Intel Corp. 80486 chip was as hot as a 350-horse Corvette. Soon the 486 will be the Dodge Dart of microchips, replaced by Intel's Pentium. Microsoft Corp.'s Windows 3.1 software, until recently the world's top PC operating system, is rendered defunct by Microsoft's Windows 95.
Small wonder, then, that sales and profits at Intel and Microsoft have tripled in the last five years. If the companies made toasters or VCRs -- products with the functional longevity of paperweights -- the results would be different.
Computer companies and their prospects have captivated Wall Street, helping to drive the tech-heavy Nasdaq stock index up by 35 percent between Jan. 1 and last Monday.
Then the rally ended. Slightly disappointing profits caused Intel stock to plunge 11 percent Wednesday, setting an all-time record for trading volume in one stock. Other technology stocks fell, too.
Is the 1995 tech rally over?
Stock analyst, Cowen & Co.
This may be wishful thinking on my part: I think the first phase of the rally is over, but there's probably going to be a second phase of the rally that's more introspective than the rally we have seen in the last six months. The tech rally turned into silly season in July. It has gotten very frothy and very toppy. Clearly [last week] was a wake-up call to investors that were following the herd.
I think what you have now are serious investors culling through the debris and picking out the companies that are best positioned. The conclusion is that what we saw [last week] may in the long run be a healthy phenomenon.
Companies like Xilinx or Microchip are extremely well positioned for the long term. Companies like Cirrus Logic are well positioned for the short term. And at Intel, if there's a problem there, it's a problem in their capital spending, which means they're investing in future products. It certainly doesn't appear to me that there's a problem in Intel's external PC business.
I think Microsoft's stock was even more indicative of the frenzy. Windows 95 could not possibly have satisfied investors' expectations. A program that provided the secrets of the universe would not have satisfied investors' expectations.
One more thing. I would not be surprised if we had one more, but less dramatic, correction, later this year.
Stuart M. Johnson
Stock analyst, Schroder Wertheim & Co.
I tend to think not -- if only because the thing that usually ends the rally in tech stocks permanently is a fundamental change in business trends -- and there is no such thing visible.
The amusing irony of this is that it wasn't even a major earningshortfall that caused the recent decline. So many people were reporting earnings that were even higher than expectations on the street, that people kept pushing the expectations even higher.
Valuations in tech stocks are OK now. I would say they are not reflective of pessimism. Back in the first quarter when I was looking at valuations, even with the run that they had had to that point in the year, they were still at levels that I would call cautious. . . the market lately has been driven by the "greater fool" game rather than by people holding the stock for longer than the blink of an eye.
James D. Poyner
Stock analyst, Oppenheimer & Co.
For at least for the next month or so, it's probably going to be a little tougher. Unfortunately, the break in the market occurred at what normally is a slow season for these companies. Normally these stocks would have already pulled back by now, so the seasonal pullback was belated.
Our strategists think the tech sector still has got another hit coming.
Some of the chip stocks and some of the telecom equipment guys and some of the other areas got very high in valuations based on next year's earnings estimates. So we'll probably have little retrenchment in valuations. The companies that have been struggling on a relative basis, they're probably the most vulnerable.
I think the general belief is, we're going to need to mend in August. For the balance of the year, I think we'll probably see some of these things pick back up.