Market wary after Compaq warning

Compaq Computer's (CPQ) profit warning knocked some of the air out of technology stocks today but did not cause the kind of market havoc that followed a negative report by Intel last week.

Investors were cautious at the opening bell, as the Dow Jones Industrial Average started out in the negative. But the bulls charged back, gaining as much as 55 points to 8624.4. By 12:30 p.m. PT, the Dow fell 1-1/2 points to 8579. Nasdaq, on the other hand, was off nearly 24 points, to 1729.67.

U.S. tech stocks had been expected to open lower today after Compaq's announcement late Friday that it may not turn a profit in the first quarter, following a similar warning from Motorola (MOT). (See related story)

Compaq shares fell to 24-1/8 in active early morning trading, from Friday's close of 27-11/16. Other stocks that slid today included Intel (INTC), which dropped 3-1/8 to 75; Dell Computer (DELL), which fell 4-3/4 to 64-1/2 at 12:30 p.m. PT; Microsoft (MSFT), which declined 2-5/8 to 80-1/8; and Sun Microsystems (SUNW), which fell 3-7/16 to 39-5/16.

A handful of Internet stocks, however, were boosted as investors shifted away from PC and semiconductor issues. Amazon.com (AMZN), Yahoo (YHOO), and OnSale (ONSL) were among the beneficiaries. (See related story)

While off today, Nasdaq is expected to recover as it did last week when, despite a round of warnings from high-tech bellwethers--including Intel, Advanced Micro Devices (AMD), Motorola, and then Compaq--it rallied back Friday to recoup 42 points of the 48-point loss it suffered Thursday. (Intel is an investor in CNET: The Computer Network.)

Even though the overall markets made a comeback, the companies that put up red flags have continued to falter. Intel today brought its losses since its warning to about 12 percent, while Motorola fell about 5 percent and AMD continued to slide to lose about 9 percent.

"I am surprised at the robustness of the market. This is a sure sign of market bubble. Investors don't listen to bad news, and it is a recipe for a major problem," said Charles Boucher, an analyst with UBS Securities. "That kind of blind faith will ultimately lead to trouble...Positive economic cycles don't last forever."

Intel and AMD appear to be hard hit by the sub-$1,000 computer sector. Customers' preference for lower-priced computers with cheaper processors has led to lower profits, and sales volume has failed to offset the declines. Motorola, on the other hand, has been affected by "significant" softness in Asia and increased price pressure in other regional markets.

Compaq said it has experienced slower-than-expected sales, pricing pressures, and increasing inventories in the North American market, creating a less-than-rosy outlook in the near term for these technology sectors.

Analysts likened this group of shortfalls to a pot that's been waiting to boil over.

Last quarter, excessive shipments built up in sales channels, only to be aggravated by weak sell-through rates, noted UBS's Boucher, noting that there is no one factor that can be blamed for the excess. Rather, he said, it is a combination of the displaced IT funds for the year 2000 and a lack of upgrades or introductions that would propel an upgrade wave.

"Applications really push the envelope," Boucher said. "The question is new applications, Office 98, and next-generation games...Will consumers find those compelling enough to upgrade? Windows 98 will be an important part of that."

Windows 98 needs to remain on track for a summer release to start a product upgrade cycle, Boucher pointed out.

"Intel has introduced the Pentium, the MMX chip, and the Pentium II without hardware upgrades," he said. "The upgrade cycle is waiting for the OS," and if that doesn't happen on schedule it will push back the recovery.

Joseph Osha, an analyst at Merrill Lynch, agreed that the problems of technology stocks are related to shifts in spending and buyers delaying upgrades.

"[All of these warnings are tied together, yes," he said. "Up until now, we have always had something to drive the need for faster processing power, and now that temporarily is not true."

That could change with voice recognition or desktop videoconferencing, which could spur more purchases, he said, warning that "$1,000 PCs might not be good if you are a company with $200 processors."