Slowdown Leaves Tech Firms Needing Windex for Their Crystal Balls
If the stock market were an airport, a lot of tech companies would be fogged in right now.
In fact, tech stocks have stalled recently because of a shortage of visibility. But it's possible that companies never had it in the first place.
Whether visibility -- roughly, the ability of a company to forecast its performance -- was real or an illusion in the past, companies' recent confessions of clouded visibility, says one analyst, are having a substantial effect on stock valuations. And predictions of a pickup in performance after the current tech slowdown may not be trustworthy, frankly.
Evidence of the visibility crisis is easy to find in earnings announcements and preannouncements during the past month:Communications-chip company PMC-Sierra (PMCS) says it has
Plus Ca ChangeSays Paul Sagawa, senior research analyst at Sanford C. Bernstein, "What passed for visibility was an assumption that things would stay the same." There's another reason that companies' vision has been clouded, Sagawa says: It's dependent on a process that's similar to the children's game of telephone, in which players pass a message down a line by whispering it into the next person's ear, usually resulting in a garbled mess by the end of the line. Top management at an equipment supplier, says Sagawa, gets a picture of the market from its sales department, which may be motivated to gild the lily. The sales department gets its cues from the engineering staff at customer companies -- people who may overstate their needs in order to get the best terms and access to equipment. Those engineers are limited by the budgets they get from their own companies' financial operations -- people, Sagawa says, who often rein in engineers' budgets, only to give in to their requests later on. In turn, financial managers at client companies ultimately get their budgets from the financial markets, he says. "It takes a long time for that to filter through in any meaningful way to top management," Sagawa says. "A lot of noise gets in the system." And that's why, he says, companies over the past few months have insisted that they see all kinds of demand for their products and services. "Then, all of a sudden, 'Omigod, we don't!' " Sagawa says. Though companies such as Yahoo! (YHOO) have predicted an
The Age of BeliefWithout referring to these companies specifically, David Brady, senior portfolio manager with the (SRYIX) Stein Roe Young Investor fund, says a lot of people -- himself included -- are making predictions about second-half 2001 recoveries in tech, based on the assumption that the
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