Tech Industry

In ugly first quarter, AMD, Intermedia shares shine

There was no place for tech stocks to hide in the first quarter as investors pummeled former Wall Street darlings such as business-to-business software maker Ariba. Advanced Micro Devices and Intermedia Communications posted big gains as Wall Street went bargain hunting.

Overall, it was an ugly quarter. CNet's Tech Index, which is composed of more than 1,200 technology stocks, fell 20 percent in the first quarter to 1,586 from 1,984. Storage, server software and networking stocks were particularly hard hit while wireless and, surprisingly, PC hardware stocks managed to eke out slight gains.

Of the 1,200 stocks tracked, only 376, or 32 percent, posted positive gains in the first three months of the year while the remaining 824 stocks lost anywhere from half-a-percent to 98 percent of their value in this same period.

And when stocks trading below $5 were eliminated from the sample, the contrast between the winners and losers was stark. With apologies to Merisel (Nasdaq: MSEL) and its 660 percent improvement (from 16 cents a share to $1.19 a share), the change in market capitalization pales in comparison to the likes of Jabil Circuit (NYSE: JBL) or Sybase (Nasdaq: SYBS), two stocks that fell 15 percent and 22 percent, respectively, in the first quarter.

The tech wreck also had big implications for Nasdaq, which posted it worst quarter ever. The Nasdaq composite started the New Year at 2,470.52 before scampering up to 2,859 after the Federal Reserve Board surprised Wall Street with a half-point cut ahead of its scheduled meeting in late January. The Fed went on to cut rates by a half point in late January and another half point in late March, but the Nasdaq still fell more than 26 percent to 1,840 at the end of the first quarter. Just a year ago, the Nasdaq topped the 5,000-point mark.

On the bright side, many analysts expect the tech sector to bounce back, but said predicting the timing of a rebound is impossible. "I sort of disagree with the people who say we'll never again see a rally in the tech sector like we did in the past couple years," said John Ederer, an analyst at Pacific Growth Equities. "It could be the tech sector again. Maybe next time it's not the Internet stocks but something else. These things tend to go through several cycles."

The winners
Advanced Micro Devices (NYSE: AMD) has seen its share of cycles in the trenches of the semiconductor industry and the first quarter treated the company's shares well. AMD shares improved from $13.81 at the end of December to $26.54 on March 30, up 92 percent and good enough to be the fifth-best gainer in the first quarter. However, it's important to note that AMD shares had lost more than half their value between September and December, setting the bar low for the first quarter.

Analysts said investors cheered the company's recent technological advances and strong products. AMD's Athlon processor is widely considered as good if not better than the Pentium 3 and Pentium 4 offerings from archenemy Intel (Nasdaq: INTC).

"AMD fell to a valuation point where it looked incredibly cheap," said Scott Randall, an analyst at Wit SoundView. "If you had to choose between Intel and AMD right now, I think most people would take AMD. But the irony here is that just when AMD has a competitive product, there's a weak PC market and an oversupply of chips. It's clear a pricing war is coming and that's not good for either stock."

Intel shares are off 12 percent for the first quarter, down from $30.06 to $26.31.

"I think AMD shares are fully valued at their current price," Randall said. "In three months, I think the world could look a little worse than it does right now for both AMD and Intel."

Intermedia Communications (Nasdaq: ICIX) made the most impressive move for the first three months of the year, jumping from $7.19 to $17.38, up 142 percent. WorldCom (Nasdaq: WCOM) is planning to buy Intermedia in a move to gain a controlling interest in Digex, Intermedia's Web hosting business.

EarthLink (Nasdaq: ELNK) moved up 141 percent, from $5.03 to $12.13, while eFunds (Nasdaq: EFDS) and NVIDIA (Nasdaq: NVDA) gained 110 percent and 98 percent, respectively.

eFunds, which provides online debit processing services, hustled up from $9.19 to $19.25 in the first quarter as investors caught on to its business model.

"The company's just now starting to develop its own identity after being spun off from Deluxe (NYSE: DLX)," said Per Ostlund, an analyst at Miller Johnson Steichen Kinnard. "People had a lot of misperceptions about this stock. Some thought it was some kind of money-losing dot-com because of the "e" in the title. Others thought it was in a zero-growth market like check printing."

eFunds, which held its initial public offering back in June, facilitates a number of online debit transactions and actually turned a healthy profit of $4.1 million, or 9 cents a share, in its latest quarter. "This company is solidly profitable and self-sufficient," Ostlund said.

Among other tech stocks posting strong gains in the first quarter, Telular (Nasdaq WRLS) moved up 81 percent; Electronics for Imaging (Nasdaq: EFII) up 77 percent; Efficient Networks (Nasdaq: EFNT) rose 65 percent; Lam Research (Nasdaq: LRCX) gained 64 percent; Legato Systems (Nasdaq: LGTO) picked up 62 percent and ActiVision (Nasdaq: ATVI) marched up 61 percent.

The losers
The list of big losers in the first quarter is littered with big-name Internet and e-business software developers that were trading at sky-high valuations not too long ago.

"These were mostly the companies that people were willing to a pay a steep premium to own not too long ago," said Peter Leppik, an analyst at Dain Rauscher Wessels. "The higher the valuations, the harder they fell in the first quarter.

E-business software developer Intershop Communications (Nasdaq: ISHP) took the worst beating of stocks trading above $5 a share, falling from $15.13 to $1.69, an 89 percent collapse.

Close on its heels were Tumbleweed Communications (Nasdaq: TMWD) and Wireless Facilities (Nasdaq: WFII), also off 89 percent each.

Wall Street turned a deaf ear toward SpeechWorks International (Nasdaq: SPWX), a maker of voice recognition software, in the first quarter as its shares plummeted 87 percent to $6.56 from $49.06. It and Nuance Communications (Nasdaq: NUAN), off 77 percent for the first quarter, both have taken a beating as enterprise customers cancel or delay orders for software that's considered more of a luxury than a necessity.

"Large enterprise customers aren't spending money on anything right now," Leppik said. "SpeechWorks and Nuance might have among the worst stock performances in the first quarter but that's because they were trading at such high valuations beforehand. Everybody in this sector is getting whacked."

Speaking of whacked, Ariba (Nasdaq: ARBA), once the B2B darling, lost 85 percent of its value in the first quarter, good enough to rank it No. 7 on the losers list.

Ariba didn't help its cause any Monday when it issued an anticlimactic profit warning for its latest quarter.

Ariba, which was trading at $53.63 in late December, closed at $7.91 on Friday.

"Ariba has just been getting killed," Ederer said. "It was always a high flyer among the group, trading at two- or even three-times the valuation of a Commerce One. And now Ariba's fall has been even more spectacular than the others."

Ederer points out that while the fundamentals for Ariba and other beaten down e-commerce software companies haven't changed, the macroeconomic environment has made it all but impossible to predict if or when these stocks will recover.

"Eventually, these customers will start buying the customer relationship management software these guys make," he said. "But when exactly is hard to figure out. I wish I could tell you."

Among other tech stocks rounding out the Top 10 losers for the first quarter, (Nasdaq: CLCK) shed 87 percent; Inet Technologies (Nasdaq: INTI) slid 85 percent; Cosine Communications (Nasdaq: COSN) plunged 85 percent; Novatel Wireless (Nasdaq: NVTL) dropped 83 percent and Kana Communications (Nasdaq: KANA) lost 83 percent of its value.>