The market seems lost today and that shouldn't surprise anyone.
Conventional wisdom says the recent market downturn represents a correction. But a true correction still has a long way to go.
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Look at Cisco Systems (Nasdaq: CSCO), generally regarded as the most solid growth engine around. Shortly before noon today, the company carried a market capitalization of about $429.7 billion, after a gain of about 8.7 percent this morning.
Now consider the 5-year average annual increase for Cisco's actual (not pro forma) net income: 48.1 percent. Pro forma results discount writeoffs of acquired in-process R&D as one-time events, but Cisco carries out so many acquisitions that it's unrealistic to discount their cost; M&A is a critical part of Cisco's long-term growth strategy, and to disregard it in any long-term evaluation is like ignoring a major product line.
Not that it matters. Actual, pro forma or otherwise, Cisco is a tremendous profit generator no matter how you look at it.
And if you buy into CSCO today, it will take the company a dozen years at that growth rate to return enough profits -- Cisco earned $2.1 billion in fiscal 1999 -- to equal your investment. Cisco is terrific and the Internet is growing rapidly, but can the company keep up its current level for the next 12 years?
Even if the company can overcome growing competition from the likes of Redback Networks (Nasdaq: RBAK) and Juniper Networks (Nasdaq: JNPR) -- whose routers and switches currently claim faster and better performance than the equivalent from Cisco -- the law of large numbers has to come into effect sooner or later. Just ask Dell (Nasdaq: DELL), whose growth has already slowed considerably despite that excellent company's best efforts.
Cisco is just one example, but you can do down the line of leading technology companies and still see extremely high valuations from a traditional perspective. IBM (NYSE: IBM) is as cheap as it gets at a "mere" 25 times earnings.
First rank players including Big Blue, Intel (Nasdaq: INTC) and Microsoft (Nasdaq: MSFT) might provide some temporary relief with their earnings reports scheduled this week. Judging by the rapid fizzle of this morning's rally, the market seems to be waiting for these quarterly reports to provide some guidance about the direction of the overall tech industry.
Expect good news, if the results already announced by companies such as Sun Microsystems (Nasdaq: SUNW) and Advanced Micro Devices (NYSE: AMD) are any indication.
Regardless of what happens, the top tech companies will probably never go back to the old days of price-to-earnings ratios in the teens or lower; there's too much money flowing into them for that to happen, barring a severe disaster along the lines of IBM in the pre-Gerstner early ྖs. But no matter what the big guys report for earnings, they won't erase doubts about the vast majority of tech and Internet stocks.
Outfits such as The Company Formerly Known As Cybershop -- now an Internet incubator called GSV (Nasdaq: GSVI), buy shares now, it's cheap, cheap, cheap! -- still float around in a penny stock Sargasso. The market won't be comfortable until these also-rans sink into the mire of bankruptcy or acquisition or something close to it, such as last week's investment in Peapod (Nasdaq: PPOD) by a Dutch grocer.
Peapod and GSV are obvious choices. No doubt, you can come up with plenty of others.
So hold back on those Ten Reasons To Buy and keep your optimism in check a little longer. Until investors round up the dogs and put them to sleep, the stock market will keep correcting.
Analyst Hany Nada reiterated a "strong buy" on NetPerceptions and said nice things about other Internet infrastructure software companies. Nada notes NetPerceptions going into today was valued at just 10 times estimated 2002 earnings, or even less discounted back to today's dollars. Two years is a long time in the Internet world, though. 22GO>