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Pulse: PC Makers Tainted by Apple's Rotten News

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As the Nasdaq gave back much of what it made during yesterday's rally, one bad



had its effect on the barrel of tech stocks.

Apple's preannouncement about weaker-than-expected sales not only hurt fellow PC makers -- the

Philadelphia Stock Exchange Computer Box Maker Index

closed down 7% -- but caused some serious second thoughts elsewhere.



tried to escape the damage by having CEO Carly Fiorina trumpet the company's confidence in its fourth-quarter numbers. Did it work? You make the call: H-P ended the day down $3, or 8.6%, to $32.

But fellow PC makers weren't the only companies hurt. Contract manufacturer



closed down 1.26, or 4%, to $29.85 on the news. And fellow contract manufacturer

SCI Systems


also fell, closing down $2.25, or 7.1%, to $29.25.

The last month, with its consistently bad news about PCs, has not been especially kind to either company. Solectron has lost 28% of its value since the beginning of November, and SCI has lost 24.2% during the same period.

Solectron announced last month that it would be buying


, a Singapore-based circuit-board manufacturer. As it turns out, Natsteel is the sole supplier of Apple motherboards, according to a research note from

UBS Warburg

analyst Scott Heritage. And about 40% of SCI's revenue come from the PC sector, said analyst David Parrish of

Dain Rauscher Wessels

. (Dain Rauscher has no underwriting relationship with either company.)

Both Heritage's note and one from

SG Cowen

today downplayed the effect Apple's fall would have on Solectron's numbers for the fourth quarter.

But stay tuned. "The volatility in the sector has been significant over the last several weeks," said Parrish. "It would be a little premature to say the bad news was priced in."

And thoughts turned to software as well. In a research note filed today,

J.P. Morgan

analyst P. Sterling Auty said Apple's performance shouldn't have a direct effect on softwaremaker



. But the weak PC market might signal that there will be a slowdown in upgrading to new software, he wrote, and suggested caution. Adobe closed down $9.50, or 12.4%, to $67.19.

Still, amid the darkness of bad earnings reports and a bearish pullback, a few of the opticals were still gleaming.

New Focus on Networks


was one of them. Yesterday, tech pundit

George Gilder

made New Focus a pick in his newsletter, and the stock soared 42%. It had fallen 58.5% the month before, largely because of investor concerns over a lockup expiration on 44 million shares. Today, New Focus closed up $3.77, or 11.6%, to $36.50.

The other shining optical was



. The manufacturer of photonic processors was capping a strong comeback to a very poor November. Avanex's shares lost 53.5% during the month of November but have risen 49% since Nov. 30. Avanex was up $5.56, or 8%, to $75.

2:30 p.m.: Apple's Sauce Unhealthy for Tech

After yesterday's breathtaking rise, tech stocks were lying down panting for breath today as investors took some profits and pondered the latest earnings debacle.

PC makers were falling the most, after



pre-announcement that its revenues would fall below its earlier, revised estimates. (

wrote a separate story on

Apple's announcement.) This evidence of an even weaker-than-expected PC market garnered a downgrade for Apple,







Credit Suisse First Boston

. All three had their ratings reduced to hold from buy by analyst Kevin McCarthy.

Apple was trading off $2.88, or 16.9%, to $14.13. Compaq was trading down $3.69, or 15.1%, to $20.71 and Gateway was trading off $1.79, or 9.5%, to $16.99.

The announcement comes a week after a similar one from Gateway, in which the computer retailer announced a wide miss of fourth-quarter estimates. Between that time and Apple's announcement yesterday, Gateway's shares had already dropped 35.3%, Compaq's 7.5% and Apple's 3.2%.

McCarthy also lowered his estimates on









, writing that investors should "expect cautionary remarks from

H-P management at its analyst meeting today."

In recent trading, all three were off, with Dell down 11.1%, H-P down 9.2% and IBM off 5.8%.

As it turns out, H-P CEO

Carly Fiorina

did indeed speak today, telling analysts at a morning meeting that the company had anticipated a softer market and was confident in its projections of revenue growth of 15% to 17% for fiscal year 2001, according to a report from



Apple's bad sauce also spilled over to semiconductors, where



was trading down 8.3%, after gaining 9% yesterday.

J.P. Morgan

analyst Terry Ragsdale wrote that Apple's big fall pointed up the weakness of the PC sector and its possible ill effects on the giant chipmaker.

A negative note from

Salomon Smith Barney

on Intel today could also account for the stock's drop. The firm wrote that this quarter is "shaping up to be

Intel's worst quarter in over a decade" and noted that it had reduced estimates for the company last week.

Semiconductors had their own earnings pre-announcement when

LSI Logic


announced yesterday that it was lowering its sequential growth estimates for the fourth quarter to 3% from 4% from original estimates of more than twice that.

Deutsche Bank

analyst Erika Klauer reduced her rating on LSI to buy from strong buy and noted that the revision came "only three weeks after LSI reiterated its comfort with fourth-quarter guidance of 10% sequential revenue growth."

LSI was trading down $1.05, or 5%, to $19.75 after gaining 14.3% yesterday.

And although he said he didn't want to sound too bearish, Ragsdale wrote that the market might not be finished taking down semiconductor valuations. He wrote it was "too early to be buying the semi sector."


Philadelphia Stock Exchange Semiconductor Index

was edging into the red, lately trading down 1.8%.

One of the positive notes in the sector was

Lam Research


, trading up 3.4% after Deutsche Bank initiated coverage on the semiconductor equipment maker with a market perform rating. Analyst Timothy Arcuri wrote that there might be demand for capacity coming in semiconductor equipment.

Other negative tech news today hit the Internet sector. Web portal



sank $5.37, or 12.3%, to $38.50, after Merrill Lynch analyst Henry Blodget reduced his estimates for the company in the first half of 2001. Blodget raised his estimates for the last two quarters of 2001, however, writing that "we believe the hangover effects of the dot-com shakeout will continue to act as a drag on online advertising market growth in these quarters." (

took a fuller look at

Blodget's revised numbers in a separate article.)

Moving way, way to the downside, broadband-component maker



announced yesterday that it would not make its fourth-quarter estimates. The company, which launched its IPO Oct. 14, was downgraded by Deutsche Bank to buy from strong buy. It was trading down recently $7.56, or 70.4%, to $3.31.