Amid Earnings and Economic News, Tech Tries for a Comeback

Economic news and earnings are making headlines today, but the biggest question is whether the technology sector can right itself after the beating it has taken over the past few sessions.

In early trading, the Nasdaq was up 69.03, or 1.8%, to 3838.66 and has traded on either side of unchanged. TheStreet.com Internet Sector index was up 20.89, or 2.5%, to 868.13. The market has looked past this morning's strong retail sales report that was hurting Treasuries.

Net/Tech Indices INDEX CHANGE % VALUE TSC Internet 20.89 +2.5% 868.13 TSC E-Commerce 0.13 -0.2% 64.03 TSC E-Finance 1/16 -0.1% 65 5/16 Nasdaq 69.03 +1.8% 3838.66

No Pain, No Gain

PaineWebber analysts had a bearish view of the "new industrials," which they said "still look excessive by traditional metrics." In a market note, they wrote that further price declines seem likely and that "new new industrials" (large-cap but recently public tech stocks) could fall by another 33% before even aggressive assumptions would put their valuations on a par with the "old new industrials" (established large-cap tech stocks).

The tech picture was grim as well. Before today's open, Robert Dickey, director of technical research with Dain Rauscher Wessels, told TSC he expected more downside ahead. He said some technical support would be at 3750, an area that it bounced off twice in January, but there was no real support below that until between 3000 and 2900, where the correction "appears to be headed." He indicated that a bounce on the open would be "a feeble attempt." The most positive thing for the market, he said, would be a sharp selloff right away with strength into the close, similar to what occurred on April 4.

For TheStreet.com Internet Sector index, Dickey said that best support is at the 700 level, which he said was possible soon. "The momentum has shifted to the downside with even more fury than when we were trending higher. It will take months for these stocks to recover this time, once they finally hit bottom," he wrote.

Among stocks that have reported quarterly numbers since the close yesterday, Ariba (ARBA) was up 2 1/2, or 3.5%, to 74 1/2 after besting projections. The business-to-business Internet software company said it lost $11.5 million, or 6 cents a diluted share, in its fiscal second quarter, excluding one-time charges. That was narrower than the 8-cent loss estimate from First Call/Thomson Financial.

Redback Networks (RBAK) was down 8 7/8, or 9.2%, to 87 1/8 despite besting estimates. Redback reported earnings of 5 cents a share vs. the 3-cent estimate.

Ameritrade (AMTD) posted second-quarter earnings of 2 cents a share, well ahead of the 14-analyst estimate of a 4-cent loss, but down from the year-ago earnings of 5 cents. Ameritrade said net revenue totaled $170.3 million, compared with the year-ago $63.7 million. It was off 3/8, or 2%, to 18 1/8.

America Online (AOL) was down 1 1/2, or 2.4%, to 61. Goldman Sachs analysts put out a note on AOL's merger with Time Warner (TWX), indicating the merger was still on track to close in the fall. "Integration has gone smoothly so far and has been focused on near-term opportunities such as cross-promotion of AOL and Time Warner properties," they wrote.

Separately, AOL announced an investment in Webley Systems, a provider of integrated communications services via phone. The company's technology allows users to send calls to PCs as well as phones and to perform a variety of tasks such as listening to email over the phone.

Goldman analyst Michael Parekh wrote that AOL's fundamentals were strong through the quarter "despite broader technology concerns regarding PC growth," and he continued to recommend the purchase of AOL shares. The company is scheduled to report earnings April 18, with forecasts for a 9-cent gain.

Forrester Bearish on Net Retailers

Lost in the shuffle of yesterday's madness was a note from Forrester Research predicting "the imminent demise of most dot-com retailers."

"The combination of weak financials, increasing competitive pressures and investor flight will drive most of today's dot-com retailers out of business by 2001," the report stated. According to the report, to survive in the online retail battleground, firms will need to redirect extravagant branding investments into three categories of hard assets, defined by scale, service and speed.

"It's time to face facts: Online retail's honeymoon is over," said Joe Sawyer, senior analyst at Forrester. "The difficulties that firms like CDnow (CDNW) and Peapod (PPOD) now face will only become more widespread. Financial turbulence and new competition will dry up venture funding and accelerate the dot-com shakeout as the year progresses."

The report indicates that consolidation will occur in three waves. First, firms selling commodity products -- such as books, software and flowers -- that have been successful since the Net's early days will consolidate by the fall of 2000 amid slowing annual growth rates. Second, the plethora of merchants selling undifferentiated products -- including pet supplies, toys and consumer electronics -- at razor-thin margins will collapse before marketing expenditures ramp up for the next holiday season. Finally, online merchants selling heavily branded, high-style products like apparel and furniture will remain stable until 2002.

"To survive consolidation, online retailers must anchor themselves by building sustainable assets that will attain scale, service and speed," the report stated. "Leaders will need to focus on hard assets that support high sales volumes and lower costs per transaction: a large, loyal customer base; in-house fulfillment capabilities; and a rock-solid internal organization."

According to the report, "Online retailers must strike back at brand confusion and product duplication by distinguishing themselves through customer service. Presence across multiple channels and platforms, exclusive manufacturer deals to carry specific products, and a range of delivery options will help to build lifetime relationships. Speed will keep retailers ahead of rivals, but it will also require a flexible business foundation. Retailers should adopt technologies and strategies that adjust to unforeseen competitive forays and customer demands."

Sawyer indicated that among all the online retail pioneers, "only Amazon (AMZN) can claim a balanced set of assets that guarantees its leadership. Pure plays with few hard assets beyond solid, full-function sites will fall by the wayside, unable to keep up with their multichannel peers." In trading today, Amazon was down 5/8, or 1.1%, to 55 3/4.

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