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Tech Industry

Tech stocks and Nasdaq in 1997

As 1997 comes to a close, a number of tech companies have managed to stay above the fray and outperform the tech-heavy Nasdaq.

As 1997 comes to a close, a number of tech companies have managed to stay above the fray and outperform the tech-heavy Nasdaq, which gained 20 percent by the end of the year. As the new year approaches, analysts expect Internet stocks to continue to soar, chip stocks to maintain their upward swing, and networking stocks to remain unpredictable.

The Nasdaq started off the year in a lull, but after the first four months turned on its heels to rise more than 36 percent during the six months that ensued. YEAR IN REVIEW Then, in October, the markets crashed as Asia's troubled economy suffered nothing short of a crisis, sending U.S. markets into a tailspin that resulted in their largest one-day drop in history. The Nasdaq slid even further in the months that followed, but nonetheless finished the year ahead, up 22.2 percent with a close of 1565.48 today.

Investors in the PC sector cheered on a number of computer makers. Dell (DELL) climbed steadily for most of the year, rising from 25-5/8 in early January to a high of 102-7/8 in October. The direct-sales computer retailer stumbled slightly in the remaining months to end at 85-1/16 today, a figure that nevertheless was far above where the company started out at the beginning of the year.

Dell's rise of more than 200 percent in share price helped it outperform its competitors. By comparison, Compaq (CPQ) stock rose 90 percent during the year, and Gateway (GTW) climbed 36 percent.

"Dell has tracked the Nasdaq well and so has Compaq," said Lou Mazzucchelli, an analyst with Gerard Klauer Mattison. "Gateway was outperforming until the third quarter, but when they announced they would have a bad quarter, the stock fell. It's been getting stronger in the last weeks of the fourth quarter, however, as the company said things are looking stronger."

Hewlett-Packard (HWP), for its part, kept up with the Nasdaq, but offered investors nothing extra.

Investors who held shares in troubled hardware makers Apple Computer (AAPL) and Silicon Graphics (SGI) were left holding the bag at the end of the year. Shares of Apple dropped about 25 percent by year's end, while SGI shares fell more than 50 percent. Apple continues to battle declining market share and heavy losses, while SGI has been posting shrinking profits as it struggled to tackle problems that arose from changes in its product line.

"Competition will be intense, but worldwide demand is robust," Mazzucchelli said in sizing up 1998 hardware stocks. "This means the leaders can extend themselves over the laggards. This is like any maturing industry, and we should expect more consolidation."

A number of notable Internet companies outperformed the Nasdaq by leaps and bounds this year.

America Online (AOL) jumped roughly 146 percent during the year, and Yahoo (YHOO) soared over 500 percent.

Lycos (LCOS) shares quadrupled, and those of Excite (XCIT) rose threefold. Most of the bang for these companies, however, came during the late summer and fall period.

"The year, as a whole, came in three ways," said Keith Benjamin, an analyst with Banc America Robertson Stephens. "The first wave was to reward those stocks that proved they were No. 1 in a particular Internet segment, and the second wave was for those that hit profitability. A third wave came as investors realized that ecommerce dollars were larger than they realized."

Benjamin added that he expects the share price for Internet stocks to roughly double in 1998, fueled by earnings growth from more ecommerce deals and more Internet companies coming into profitability.

NASDAQ Chart

Netscape (NSCP) was a notable exception to the good financial fortune seen by the majority of Internet stocks. The company has seen its share price lose more than half its value during the year, as investors grew increasingly concerned about the looming presence of Microsoft (MSFT) in the browser market that traditionally had been Netscape's domain. The company is moving to shift its business to the server market in the coming year in an effort to offset its losses.

Microsoft's stock has taken a beating this month as its fight with the Department of Justice over antitrust issues and allegations of breaching a 1995 consent decree drag on into the new year.

The software giant saw its share price drop roughly 17 percent during the past four weeks, but when compared with the rest of the year, Microsoft--even though it heavily weights the Nasdaq--saw a roughly 50 percent rise by the end of the year, far outperforming the market.

Chip investors experienced a healthy ride up through August of 1997, but ended up virtually right back where they started.

The Philadelphia Stock Exchange semiconductor index opened 1997 at 238.54 and rose as high as 405.48 in August, but then quickly retracted to finish at 261.58 today, ending up with a 9.6 percent gain since the start of the year.

"The [semiconductor] group did well until July, when shipments slowed," said Michael Gumport, an analyst with Lehman Brothers. "The hardest hit were the commodity memory makers."

Intel (INTC), for example, started the year at 65-3/16 and rose as high as 102 per share in August. The chip giant since has taken a tumble, closing at 71-11/16 today. Intel stock posted a gain of 6.5 percent over the start of the year, but continues to lag behind both the semiconductor index and the Nasdaq.

[Intel is an investor in CNET: The Computer Network]

Advanced Micro Devices (AMD) fared even worse, ending the year about 32 percent below its January level.

The chip sector may have hope for better prospects in the new year, said Lehman's Gumport. "It will be a tough first month as people look at estimates that are generally high, but business will pick up in February due to seasonality, and the U.S. economy is looking strong," he noted. "After the first of the year, the group should move up pretty substantially."

Networking stocks, however, didn't move as a group this year, and aren't expected to in 1998, said Martin Pyykkonen, an analyst with Furman Selz.

"3Com (COMS) and Bay Networks (BAY) move independently of each other and the market because of issues particular to them," Pyykkonen said.

3Com was hit during its first quarter by steep pricing pressure from Intel, which cut prices on its adapter cards. During the most recent quarter, 3Com was hit with a steep drop in profits as inventory from its modem business reached levels that required the halting of new shipments to the channel. The company's stock has fallen more than 50 percent since the start of the year.

Bay Networks (BAY), which had seen its stock more than double during the five months leading up to October, gave up roughly 40 percent of those gains in the months that followed. Bay, however, has managed to end the year up about 22 percent over January, in line with the Nasdaq's performance.

"Bay fell off in the later part of the year due to Asia, and there was a lot of pricing pressure in the networking industry," said Pyykkonen, adding that, as Bay rolls out new products, investors will have to wait and see if pricing pressure will cut into the typically fatter profit margins that result from the debut of new product lines.

Cisco, meanwhile, also is up for the year, and also has tracked the Nasdaq's performance--a logical outcome given that the market is heavily weighted with Cisco shares.

"If Cisco is at or slightly above the Nasdaq average, then that's a good year [for the company]," Pyykkonen said. "Companies with a market cap of $1.5 billion or less generally are having a good year if they are at 20 percent above the Nasdaq."

Looking toward 1998, Pyykkonen said networking stocks will continue to move independently of each other.

"There won't be a group message. Investors will have to be highly selective, as opposed to investing in the sector," he said.