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The
New Tech Landscape- 4/24/01
Success and growth attracts competition. Ultimately,
competition impact profit margins and growth rates. Each subset of technology
has formidable competition, and investors need to be aware of the new
"level playing field". Additionally, many legacy players are defending
older standards that will impact future growth, market share and profit margins.
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For
instance, Cisco now has to deal with Juniper on the high end router, and
Riverstone on the low end. Cisco also has to deal with newer switched based
systems that will run into Marconi switches on one side (ATM), Extreme
Networks (Gigabit Ethernet), and Corvis and others in the all optical
switch. Cisco has seen their market share erode. Their problems are not,
despite their PR efforts, confined to the economy.
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Intel
has AMD in the consumer space and Sun Micro in the industrial strength area.
They are struggling in the price/ performance area and have the same issue
with their stock price, where their 30x multiple does not stack up as
attractive vs. AMD's 12x.
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Oracle
has competition that represents a serious price/performance choice including
Microsoft on the low end, and BMC Software on the higher mainframe end. IBM
has just purchased Informix which will put more heat on Oracle and give IBM
the opportunity to deploy its huge salesforce in this space. Increasingly,
IBM is putting the pieces together, and possesses a market multiple.
Increasingly, their business is comprised of higher margin services with
recurring revenues.
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Dell
and Compaq increasing battle each other, the weak economy, and the growing
number of alternative access devices which has dimmed growth momentum.
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In
the broader chip categories we have serious competition, serious
overcapacity and many ASIC's companies (like CY and VSH) sell at very low,
cyclical multiples. While these companies are attractive as value plays and
reasonable price move puts them out of value, and they are not growth
stocks. They are cyclicals.
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In
the Internet, we have myriad issues. Advertising does not work for the the
advertisers and they are really picky about where they advertise and at what
price. This has forced many content companies into trying various e-commerce
efforts and subscription services. With respect to the latter, the takeup
rate is low because of the great amount of free alternatives. Content is
more concentrated than ever and that trend will continue. MSN and AOL are
the ultimate aggregators. YHOO appears to be the odd man out.
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In
telecommunications myriad issues swirl around these equities. Too much fiber
capacity, and the movement of more data and video over the Internet cloud is
rupturing the business models of legacy players like ATT and Worldcom.
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In
the area of operating systems, the increasing support of players like IBM
for Linux, can spell trouble for MSFT, which also must battle free offerings
of StarOffice, a free office suite with all the functionality of Office
Professional.
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Technology
needs growth and and it needs market share to command premium multiples. At
this point we still have premium multiples, but we also have negative
sequential growth, and declining market share.
While technology clearly critical to the US and
world economy, this is not like shooting fish in a barrel. It is a most
dangerous game. Being overweighted in tech may be ill-advised. There should be
overweightings in early cyclicals and financials.
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