Tuesday, January 22, 2008
Perfect Storm For Tech Stocks
The problem with tech stocks is that these are fair weather friends. When the markets are bullish, tech stocks surge in value. By the same token, when panic spreads on the bourses, the first to go belly up are tech stocks. Now this wouldn't be so bad, were it not for the fact that after a rout, most tech companies do not have the capability to pick up the pieces and slog on. Bear in mind that most tech companies are relative newcomers without significant assets and infrastructure, funded by VC funds and IPOs, and a whupping at the stock market all but erases their very existence.
The only thing holding the tech sector from absolute chaos is the rock solid steadiness and continued growth of bell weather companies - Google, Microsoft, Apple, Cisco, IBM and...Yahoo!....Remember that in 2000, Google was a private company, and Microsoft ruled NASDAQ. When a judge ordered the breakup of Microsoft in the anti-trust case, MSFT tanked, and brought down the entire tech sector, which was essentially a bubble riding on the back of Microsoft's spectacular success in the 90's.
Well, this time, every tech startup in Silicon Valley has been riding on the back of the unabated growth of ad revenues by search darlings Google and Yahoo!, and Apple's hot products, not to mention a spirited revival of MSFT's fortunes with Vista and a new and improved Live search. But as the U.S. economy heads south, spreading panic in Asian and EU markets, the first to tank are the tech stocks on NASDAQ, fulled by Apple's sub par forecasts. The S&P 500 started sliding in after hours trading, with Apple alone falling by 9%, both GOOG and YHOO down 2.1%, and S&P 500 futures SPc1 down 8.30 points.
Now this drop has not really factored in the news that Sunnyvale based Yahoo! Inc. is planning to trim it's 14,000 employee by about 5%, or 700 workers. Once the actual news that Yahoo has downsized hits the fan, well...Anyway, fact is, this has been a long time coming. Google will no doubt continue on its way, gobbling up more and more of the market share. But Yahoo has been steadily losing ground in 2007, bleeding both ad revenues and market share, and their plans to fight Google are just about dormant. In other sectors, like music and multimedia streaming, a string of acquisitions like Rightmedia ($680M), Zimbra ($350M), Wretch ($21M) and Bix.com ($20M) has resulted in nothing except more red ink. The one place where Yahoo! has a leg up is in travel search, with their Farechase acquisition beginning to show results, but even there they face an expensive price and ad war with Kayak. Unless they come up with a market leader soon, there's a lot more pain in store. The 700 Yahoo! employees about to get a pink slip are merely the tip of the iceberg. Things being as they are, Yahoo will have to take drastic measures, including downsizing and dropping plans for new acquisitions, both of which will further affect performance and long term viability.
So, what we have here is a perfect storm for technology companies without a sound model. The economy is weak, the tech sector is suffering from a lack of growth, and the 'overgrowth' of the last 5 years is due for a correction. For companies like Yahoo!, the time for corrections has begun. Question is, how long will this downturn last, and how many tech companies will be left standing in the aftermath.
The only thing holding the tech sector from absolute chaos is the rock solid steadiness and continued growth of bell weather companies - Google, Microsoft, Apple, Cisco, IBM and...Yahoo!....Remember that in 2000, Google was a private company, and Microsoft ruled NASDAQ. When a judge ordered the breakup of Microsoft in the anti-trust case, MSFT tanked, and brought down the entire tech sector, which was essentially a bubble riding on the back of Microsoft's spectacular success in the 90's.
Well, this time, every tech startup in Silicon Valley has been riding on the back of the unabated growth of ad revenues by search darlings Google and Yahoo!, and Apple's hot products, not to mention a spirited revival of MSFT's fortunes with Vista and a new and improved Live search. But as the U.S. economy heads south, spreading panic in Asian and EU markets, the first to tank are the tech stocks on NASDAQ, fulled by Apple's sub par forecasts. The S&P 500 started sliding in after hours trading, with Apple alone falling by 9%, both GOOG and YHOO down 2.1%, and S&P 500 futures SPc1 down 8.30 points.
Now this drop has not really factored in the news that Sunnyvale based Yahoo! Inc. is planning to trim it's 14,000 employee by about 5%, or 700 workers. Once the actual news that Yahoo has downsized hits the fan, well...Anyway, fact is, this has been a long time coming. Google will no doubt continue on its way, gobbling up more and more of the market share. But Yahoo has been steadily losing ground in 2007, bleeding both ad revenues and market share, and their plans to fight Google are just about dormant. In other sectors, like music and multimedia streaming, a string of acquisitions like Rightmedia ($680M), Zimbra ($350M), Wretch ($21M) and Bix.com ($20M) has resulted in nothing except more red ink. The one place where Yahoo! has a leg up is in travel search, with their Farechase acquisition beginning to show results, but even there they face an expensive price and ad war with Kayak. Unless they come up with a market leader soon, there's a lot more pain in store. The 700 Yahoo! employees about to get a pink slip are merely the tip of the iceberg. Things being as they are, Yahoo will have to take drastic measures, including downsizing and dropping plans for new acquisitions, both of which will further affect performance and long term viability.
So, what we have here is a perfect storm for technology companies without a sound model. The economy is weak, the tech sector is suffering from a lack of growth, and the 'overgrowth' of the last 5 years is due for a correction. For companies like Yahoo!, the time for corrections has begun. Question is, how long will this downturn last, and how many tech companies will be left standing in the aftermath.
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