Internet

Return to Article

Six Things We Learned About Tech Last Month

Kevin Kelleher

Are you still standing?

Have you decided, reluctantly or vehemently, to stick with tech stocks, nurturing a nagging feeling that there is -- somewhere, sometime -- a way back into this sector that was only a few short weeks ago deemed recession-proof?

Great. Let's recap what we learned (or had to relearn) in that tumultuous month of January 2008 so we can march forward better informed -- or at the very least offer up a few more talking points at cocktail parties.

1. Giants age - quickly so. Middle age happens to all of us, eventually. For Internet companies, it tends to strike at the first-decade milepost. Google has staved off the stiff limbs and sedentary impulses that other Internet leaders from the 1990s have struggled with. But, it seems, that may be history.

Ever since it went public, Google's search and advertising technologies have been a cornucopia of growth. Bears would ask what its follow-up act would be, where revenue would come from once search flattened out, etc. Yet growth kept gushing forth, so no one cared much.

Today, Google's stock is falling, not because it's getting sideswiped by an economic slowdown, but because revenue growth is slowing on its own.

That big fat deal with News Corp.'s MySpace isn't -- in money terms -- what it should have been, as Google CFO George Reyes confessed in Thursday's conference call. And for some confounding reason, people are clicking less on AdSense links than Google wants them to.

Those non-search revenue streams -- Google Apps, YouTube revenue sharing -- better start delivering soon, because after five years the old safety net is fraying.

2. Yahoo! will get better, but it'll get much worse first.

Are you listening, Steve Ballmer?

Remember those movies where someone is treading a rickety footbridge of rope and wood planks, and it just may collapse halfway there? That's Yahoo!.

Investors are on the near side of a steep canyon. On the other side is solid rock and paths to riches. But certain peril stands between the two. Right now, the only question is whose investors will make that terrible journey. Is it Microsoft's , should it control Yahoo!, or Yahoo!'s alone? The journey, whether its respective CEO Jerry Yang's or Steve Ballmer's, won't be fun.

Yes, Yahoo has been making moves -- like incorporating del.icio.us into search results - that, in hindsight, it should have made a year or so ago. Meanwhile, Yahoo! had been buffeted down 12% in the past week because of the paltry fruits of seeds planted in quarters past.

That plank beneath Yahoo!'s front axle is splintering now, but it may well be that the stock crosses over to solid ground by the end of the year. Until then, expect rockin' and rollin'.

3. Healthy stocks are cheaper, and I feel fine. IBM's (IBM Quote) fourth quarter -- nice. Microsoft -- pretty good. So why doesn't it show in their stocks?

It will. IBM did well in 2007, closing the year at $108, up 13% in the year. Yet despite surprisingly strong earnings last month, it finished Thursday at $107. That's not to say it's been stable, it spent January between $97 and $108.

IBM has a history of rising when the tech sector is falling. In late 1998, it rose 6% while the Nasdaq fell by one-third. And it rose 20% between March 2000 and December 2001, while the Nasdaq lost 60%.

Now, IBM is 15 times last year's earnings, below the 16.5 average ratio for the beaten-down S&P 500. It's 13 times the 2008 estimates.

Microsoft, before its Yahoo! bid, was down a relatively healthy 8% this year, thanks to a scattershot portfolio that embraces a dying PC software business, stronger-than-expected Vista sales, video games and stuff from health to robotics. That kind of mixed bag looked eclectic a few months ago, but seems sanely diversified now.

Like IBM, Hewlett-Packard gives hope that -- beaten down to 11.5 times its lowered yet still expected earnings this year -- it will spring jack-in-the-box-like against January's broad-based selling. Yet IBM and H-P are 12% and 18% below their 2007 highs, respectively.

4. Pricey stocks are cheaper, and I feel fine. OK, not quite so fine, but still.

Let's take VMware , which had this week's 32% slide coming for a while now. VMware went public at $29 and closed its first day at $51. That was just one day. Since then the stock surged inexplicably to $125 and back down to $56.

What changed? Nothing really, except sentiment. Before this week, VMware -- according to the herd -- had the whole virtualization market sewn up for itself. Once the stock dived, it was suddenly vulnerable to competition. That's market punditry.

Now, VMware is still 50 times its coming earnings, which is nowhere near a buy sign. But it's a little easier to breathe now that that ratio is well into the double digits. It'll be some time before stocks like VMware are appealing, but it's just a relief to know they're getting back there.

5. Margins still matter. Shares of Amazon.com are down 16% this year to Yahoo's pre-Microsoft bid 17% fall. Anyone who bought Amazon recently with its P/E ratio near 90 has got some explaining to do.

Amazon's earnings are a pendulum swinging from big revenue growth to big investments that guarantee same. The margins tell the story, and in 2007 the investments of years past -- harshly criticized by bears -- turned into nice revenue growth.

Last quarter, Amazon's revenue beat expectations, while spending disappointed. Since the company plans is to expand market share, it wants to make that land grab while a slow economy is hurting its rivals. That's smart long term, but for now it's hurting margins.

In short, bears will hurt Amazon in the near-term, whereupon bulls take it back.

6. eBay reinvents itself -- again.

Good for you, eBay! Does anyone else care?