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2HRS2GO: Y2K could threaten server vendors

You'd think the market has discounted Y2K-related cutbacks on technology spending by now.

You would think so. And if you did, you would be wrong, says one of Wall Street's better known computer hardware analysts.



Should server vendors worry about Y2K?



Banc of America Securities' Kurt King today slapped "hold" ratings on Sun Microsystems Inc. (Nasdaq: SUNW) and Hewlett-Packard Co. (NYSE: HWP), both of which he had previously recommended as "buys". The millenium bug is to blame.

King, whose employer used to be called Nationsbanc Montgomery before the big BofA-Nationsbanc merger, surveyed 50 large organizations and found that slightly more than half plan to cut fourth quarter IT spending by anywhere from 10 to 80 percent. Given that no major hardware vendor has yet warned of such a slowdown, Wall Street estimates haven't factored in Y2K effects, King says.

Why single out Sun and Hewlett-Packard for downgrades? Because they're Unix houses whose hardware handles enterprise computing's most important networking tasks. Large organizations aren't likely to fool around with their "mission-critical" systems just before the millenium.

"A few of our respondents outright scoffed at the notion they'd install UNIX systems in the couple of months in front of the rollover," write King and his associates. "Our general findings therefore make us most concerned about Sun and HP, who we're downgrading today, as well as IBM, who we don't cover."

King has a retro attitude in some ways, because he's worried that Sun, HP and Big Blue are trading at "high forward multiples". I suppose they are, at least by old-fashioned standards: going into today, Sun, Hewlett-Packard, and IBM were trading at price-to-estimated-earnings multiples of roughly 35, 26 and 30, respectively, based on First Call consenus forecasts.

Note that we are talking about technology stocks here. Nowadays, big-name tech stocks tend to trade at multiples of 50 and up. If you compare the aforementioned enterprise hardware vendors to the likes of Microsoft (P-E of 53 as of Friday's close), Intel (23), Dell (47), Cisco (109) or Yahoo (389), Sun and HP don't seem so unreasonably valued, even with a Y2K slowdown factored in.

Still, you can't fault King for his caution, especially in light of what the enterprise software sector went through. As King notes in his report, ERP analysts started warning of Year 2000 problems as early as late 1997, but the market didn't start factoring it in until almost a year later.

King maintains buy ratings on Dell Corp. (Nasdaq: DELL) Compaq (NYSE: CPQ) and Tech Data Corp. (Nasdaq: TECD), but with reduced estimates. He sees nothing much different with Gateway 2000 Inc. (NYSE: GTW), Ingram Micro (NYSE: IM) and Apex (Nasdaq: APEX).

So it's really not a bleak picture by any means -- even Sun and HP are still good long-term bets, once you get past the fourth quarter of calendar 1999. Contemporary Wall Street parlance equates "hold" with "sell" nowadays, but for once, take it at face value -- hang onto what you've got, and ride it into next year.

Silly studies

I suppose the Media Metrix news release that appeared in today's e-mail means something to someone in Scandinavia, but even there, it can't be that big of a deal: "SWEDISH WEB USER HABITS SIMILAR TO U.S. USERS" (caps theirs).

Did anyone really expect that Sven in Stockholm would surf all that differently from Bob in Boston? But it's sort of depressing to see that Swedes go for the same bland Redmond-created content that Americans seem to: MSN.com; Altavista.com; Hotmail.com; Microsoft.com and Geocities.com. You'd expect spicier tastes from the country that, as a John Candy character once noted, produces some of the world's finest soft-core entertainment.

Other issues:

  • Merrill Lynch & Co.
  • (NYSE: MER) Wall Street old-timers just don't get it. It's foolish to offer some online hybrid that sells Merrill's offerings at a price discounted from their norm, but still far above Internet competitors' services. Either play the online discount game, or don't. But the financial world doesn't subscribe to Buddhism -- there is no Middle Way.

  • Apple Inc.
  • (Nasdaq: AAPL) As more Wall Street analysts jump on the Apple cart, you have to wonder if it isn't time for investors to get off. After all, the iMac line has been around for three quarters now -- an eternity in the world of high-tech hardware -- and events seem to be catching up: eMachines is now encroaching on the low end; AMD and Intel are pushing each other into more rapid chip cycles on the high end; and on the software front, Linux offers another alternative to the "anything-but-Windows" crowd.

    Whatever technical and ease-of-use benefits the iMac may offer, the competition is running faster every day. Over the long run, can one company match an entire industry driving itself into a frenzy? I have my doubts.

    Overall, technology stocks were retreating in mid-afternoon trading. With two hours left in regular trading, the Nasdaq Composite Index was down 43.55 to 2426.97, the S&P 500 had fallen 14.63 to 1287.21, and the Dow Jones Industrial Average had slid 90.44 to 10469.30. 22GO>

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