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Optic stocks puncture Nasdaq

Tech stocks fall, a day after a disappointing earnings report from Nortel Networks caused investors to question the once-formidable optical networking sector.

Tech stocks fell across the board on Wednesday, a day after a disappointing earnings report from Nortel Networks caused investors to question the once-formidable optical networking sector.

The Nasdaq composite index dropped 190.20, or about 6 percent, to 3,229.59, and the Standard & Poor's 500 index fell 33.23, or 2 percent, to 1,364.90. The Dow Jones industrial average fell 66.59 to 10,326.48.

Telecommunications equipment maker Nortel Networks on Tuesday reported that third-quarter earnings rose 64 percent, but sales numbers fell short of some expectations.

Net earnings for the third quarter were $574 million, or 18 cents per share. That compares with earnings of $314 million, or 11 cents per share, for the same period in 1999. According to a survey by First Call/Thomson Financial, analysts expected Nortel to earn 17 cents per share.

Revenue totaled $7.31 billion, compared with $5.15 billion from a year ago. Some analysts expected the company to post sales of more than $7.5 billion in the third quarter.

Shares of Nortel fell $18.31, or nearly 29 percent, to $45 on a volume of more than 123 million shares, more than eight times the stock's average daily volume of about 15 million.

Other network equipment makers also took a hit. Ciena dropped $27, or nearly 20 percent, to $108.38; JDS Uniphase declined $24.06, or 25 percent, to $71; Applied Micro Circuits lost $50.31, or 25 percent, to $148; Corning stumbled $16.63, or about 18 percent, to $76.88; and Cisco Systems fell $4.25 to $50.62.

"It's not pretty," said Kathy Taylor, vice president and assistant manager of Nasdaq trading at A.G. Edwards. "People are continuing to look for the flavor of the month, and here's another bubble that's been burst," she said.

The sector has enjoyed tremendous gains despite the volatility in the Nasdaq. Ciena has gained about 276 percent so far this year. Applied Micro has climbed 132 percent, and Corning has risen about 79 percent. By contrast, the Nasdaq has fallen nearly 21 percent so far this year.

Taylor also said that the firm has seen more sell orders from regular investors than professional investors today, something that has not happened in other market downturns.

"We have 6,800 (retail) brokers and about 25 institutional traders, and we're getting a lot of order flow from the retail side," said Taylor.

Although the sell-off on the Nasdaq turned ugly, other market observers recommend more prudence.

"I don't think (Nortel) is a proxy for the global economy," said Tracy Eichler, an investment strategist at PaineWebber. "It's a stock by stock, industry by industry issue."

Eichler noted that the 90 percent revenue growth Nortel posted for the quarter--though not as great as the 130 percent growth that analysts expected for the company's optical business--is still exceptionally strong.

Eichler also believes that people quickly lose sight of the big picture during earnings season. "Everyday, investors focus on an earnings number, but not the earnings for the market as a whole," she said.

The CNET tech index fell 164.10 to 2,522.24. Losers pasted winners, with 84 of the 97 stocks in the index falling, 10 rising and three remaining unchanged.

Nearly all of the 18 sectors tracked by CNET Investor posted losses. Telecom equipment companies and semiconductor makers led the way down, plunging about 14 percent and almost 10 percent, respectively.

The Philadelphia semiconductor index fell 51.28, or 7 percent, to 665.09. Among the losers was Linear Technology, which lost $8.63, or nearly 13 percent, to $54.56.

Chipmaker Maxim Integrated Products fell $20.25, or 26 percent, to $57.19. On a conference call Tuesday after reporting fiscal first-quarter earnings, the company told analysts to expect quarter-to-quarter revenue growth of about 7 percent, down from the 12 percent it had been achieving over the last four to five quarters, said Tore Svanberg, a Robertson Stephens analyst.

Shares of AT&T fell $3.50, or 13 percent, to $23.38 after the company officially announced that it would split into four separate parts.

In a conference call on Wednesday, AT&T chief executive C. Michael Armstrong and other company executives outlined a four-way deconstruction of Ma Bell, with the broadband and business units becoming separate companies and consumer services being listed under a tracking stock with its own chief executive.

Leading e-tailer Amazon.com on Tuesday reported a third-quarter loss that beat analysts' estimates. That sent the shares up $2.31 to $31.88.

Investors liked the earnings news from Amazon.com. Excluding acquisition costs and investment gains and losses, the Seattle-based company posted a pro forma net loss of $89.5 million, or 25 cents per share.

Analysts expected Amazon to post a pro forma loss of 33 cents per share for the third quarter, according to a survey by First Call/Thomson Financial.

Amazon also reported in its earnings release that the Securities and Exchange Commission has launched an informal inquiry into Amazon's accounting practices related to the e-tailer's commerce network, the company said Tuesday.

PcOrder.com rose $2.69, or 78 percent, to $6.13--the largest percentage gainer on the Nasdaq. Trilogy Software said in a statement that it agreed to buy all of PcOrder's outstanding Class A common stock for $6.38 a share. Trilogy currently owns all of PcOrder's outstanding Class B common stock.

CNET Networks was the largest percentage gainer on the CNET tech index, rising $3, or nearly 12 percent, to $28.69, and was followed by Amazon.com.

CNET, the publisher of News.com, posted a third-quarter loss of 50 cents a share after writing down the value of businesses it acquired compared with a profit of $29.3 million, or 35 cents, a year earlier.

Profit before amortization of goodwill and gains from equity investments was $6.2 million, or 7 cents a share. That was more than the 3-cents-a-share average estimate of analysts polled by First Call/Thomson Financial.