Pulse: Doubts of Survival Shadow DSL Companies, Sinking Stocks

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Can the DSL carriers carry on?

The doubts are out there after the nation's largest phone company,

Verizon

(VZ) - Get Report

, canceled a merger deal with

NorthPoint Communications

(NPNT)

, a wholesaler of digital subscriber lines.

After the death of the merger was announced, NorthPoint's stock dropped more than 70.3% today after already having fallen more than 94% from its high in early January. NorthPoint closed down $1.41 to 59 cents. In January, it was trading at $33.06. Verizon, which raised its estimated earnings per share for both 2001 and 2002 after killing the deal, rose, closing up 38 cents to $56.19.

RBC Dominion Securities

downgraded NorthPoint from neutral to sell, and analyst David Bank wrote that it was unlikely the company would emerge from its financial problems as an independent concern.

Gerard Klauer Mattison

analyst Rachael Rennert wrote a similar opinion.

Fellow DSL resellers

Covad

(COVD)

dropped 3 cents, or 1.6%, to $1.97, and

Rhythms NetConnections

(RTHM)

fell 19 cents, or 14.6%, to $1.09. Both stocks are trading far below their highs for the year. Covad has dropped more than 97% since its high of $66.25 in March, and Rhythms is down more than 97% from its high of $47.30.

The problems facing the three are similar: trying to fund the rollout of a DSL network before running out of money.

"It's a race to profitability, and I don't know if any of these guys are going to get there," said David J. Bank of RBC Dominion Securities. (His firm has no underwriting relationship with the companies.)

NorthPoint, which has threatened to sue Verizon over the broken deal, has enough cash to fund itself through the first quarter of the coming year, according to a note written by

Merrill Lynch

analyst Kenneth Hoexter. Rhythms just got a

loan offer from

Cisco

(CSCO) - Get Report

of $50 million, an addition to $75 million loaned to the struggling carrier earlier.

Bank said he expects that NorthPoint will announce some cost reduction, as Covad did earlier this week when it said it was laying off 400 people, 13% of its workers.

The DSL companies' best bet to survive will be as an acquisition by a larger carrier, Bank said, although they can't hope to bring as much as their earlier valuations would suggest.

"I still think they're attractive to a Bell, but at what price," Bank said.

2:38 p.m.: Chip and PC Stocks Mauled

Like a train wreck that never seems to stop, one tech stock after another was derailed today by earnings warnings. And like ambulance chasers at an accident scene, equity analysts showered these companies with an avalanche of earnings revisions and downgrades.

"People are getting more and more bearish. The fear and the ugliness are getting more and more palpable," said Sam Ginzburg, senior managing director of equity trading for

Gruntal

.

Yesterday's bad news from computer giant

Gateway

(GTW)

and chipmaker

Altera

(ALTR) - Get Report

came home to roost not just in the PC and semiconductor sector. Gateway's warning that revenues would fall $500 million short of the $3.05 billion planned for the fourth quarter prompted eight analyst downgrades. Gateway was trading down $11.51, or 39%, to $17.99.

TheStreet.com

wrote a separate story on

Gateway's woes.

Gateway blamed a general slowing in demand for PCs. Desktop seller

Dell

(DELL) - Get Report

, which has already been beaten down, was downgraded today by

Lehman Brothers

and

Salomon Smith Barney

. "In general, we believe that Gateway's pre-announcement and others in the space will inflict collateral damage on Dell shares," wrote Richard Gardner of Salomon. Dell was lately 12.6% lower.

Other desktop PC makers tumbled in sympathy.

Compaq

(CPQ)

, which defended itself against an analyst's report this week that said it was holding inventory, was trading down 17.4%.

Apple

(AAPL) - Get Report

, which acknowledged last month that it was working down excess inventory and had revised its earnings estimates, was down about 7.8% And

Hewlett-Packard

(HWP)

was sinking 7.6%. Hewlett, which missed fourth-quarter estimates by 10 cents a share, earlier today reiterated that it remains comfortable with its

growth outlook for 2001.

Any good news in the sector? Well, the

The Philadelphia Stock Exchange Computer Box Maker Index

was down 10.3%

Investors in PC and wireless chip companies have been digesting warnings of slowing demand for months. But communications chip stocks have only recently gotten their wake-up calls with announcements last month by optical leader

Nortel

(NT)

and networker

Cisco

(CSCO) - Get Report

of slowing demand and inventory stockpiling. Cisco said its inventories of some components were much higher than expected. And Nortel announced a slowing in orders for telecom equipment. Just how slow, is the question.

"Is it slowing from 100 mph to 90? Or is it slowing to 40? We don't know," said analyst Sandy Harrison with

Pacific Growth Equities

.

Chip maker

Altera's warning last night that it would miss fourth quarter revenue estimates because of a slowdown by DSL customers prompted wholesale reviews by analysts of a number of chip stocks and a massive bloodletting in the sector. Five brokerage houses downgraded Altera, which was trading down 7.5%.

Don't look here for a silver lining.

Credit Suisse First Boston

analyst Tim Mahon downgraded six semiconductor stocks, writing, "we believe the fundamental picture facing all of the companies in our universe has created an environment where there is no place to hide."

Altera competitor

Xilinx

(XLNX) - Get Report

, downgraded by Credit Suisse First Boston, was trading down 9.3%

Lattice Semiconductor

(LSCC) - Get Report

, which had its rating and financial projections reduced by analysts, was off 11%.

Cypress Semiconductor

(CY) - Get Report

and

Fairchild Semiconductor

(FCS)

were -- surprise -- both downgraded and trading lower. Cypress, which makes chips for communications products and for PCs, was trading off 22%. Fairchild, downgraded by

Merrill Lynch

and CSFB, was losing 12.2%.