Robbie Stephens Tech Conference: Q&A With a Tech Stock Mac Daddy

Does the Internet <I>really</I> change everything? Research director John Rohal gives <I>TSC</I> some context.
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SAN FRANCISCO -- This week kicks off the Robertson Stephens Tech 2000 Conference at the Sheraton Palace Hotel ... who cares? Well, anyone holding any kind of tech stock ought to. Robertson Stephens has helped shape Silicon Valley's best and brightest -- the tech companies that have come to define the new economy. This week, "Robbie" (as the firm is know on Wall Street) will gather a few hundred of these companies to explain the world as they see it -- and give some insight on the near-term future for their stocks.

For a preview of the conference,

TheStreet.com's

West Coast bureau invited Robbie's research director,

John Rohal

. From his post at Robbie for the last 7 years -- and 10 years at

Deutsche Banc Alex. Brown

before it -- Rohal has had special insight into the long-term trends of technology stocks. He has supervised some of the best tech analysts on the Street, and has been deep in the technology trenches since the late '60s.

What follows is an excerpt from his comments:

TSC:

What is going

on

with this market?

Rohal:

You know, obviously, we had a very strong

Nasdaq

. If you look at the

S&P

500 over a 25-month period starting Jan. 1, 1998, S&P was up about 43%, Nasdaq up about 179% and our

Robertson Stephen's Technology Index

up about 370%. So, you know, the techs

are just seriously outpacing the Nasdaq, which seriously outpaced the S&P 500.

TSC:

So how do you break that down?

Rohal:

Well, it's been an amazing two years. I think '98 was the year we saw the Internet taking a lot of shape in. Certainly, in the consumer base areas, the content and portals and networks were really shaping up and then in '99 it really grabbed hold and you kind of had "e-tailers" have a tremendous run and then B2B coming up underneath that. And if you just look at aggregate value creation, there's about $800 plus billion of market cap ... and in the B2B space, we've now created almost $100 billion in market capitalization from almost zero at the beginning of '99. So B2B is really a '99 phenomenon.

TSC:

But how does that play itself out in the broader market? Are blue chips dead?

Rohal:

If you look back, August of '82 was believed to be the start of this bull market. So I use that as the benchmark year to start tracking technology vs. the S&P 500 and the chart really worked pretty well up through this past year. It peaked, it dipped, it went through various gyrations. But in '99 -- one of two things happened: either we've lost all control, or we've entered a new era, I guess.

TSC:

Maybe both.

Rohal:

Yeah. I think it is both. The Internet really has changed the game. We've entered a phase where the rules are going to be rewritten for lots of different industries.

TSC:

We've heard that one before.

Rohal:

The Dow is down again, and the Nasdaq up again. The cute explanation for that is the new economy vs. the old economy, right? But the reality is, there are some more meaningful answers to it. One, interest rates rising and people worried that the economy is going to be slowed by the Fed. So you don't want to be in classic cyclical industries because you know their earnings are going to slow in a rising interest rate environment. So it's a unit volume play: technology and Internet-related companies are unit volume plays. They can presumably do well in a slumping economy, so there's a certain amount of rotational shift to unit volume plays.

But I think more importantly is people are looking at how they can get the most growth out of the future with the least risk. And, in a strange way, there probably is a better opportunity to do that on the Internet and technology than there is in classic industries where I think you're going to see a total re-sorting. I don't know, I'm sure you have noticed, you know, what's going on with

DuPont

(DD) - Get Report

making investments with ICG.

Ford

(F) - Get Report

and

General Motors

(GM) - Get Report

putting a bunch of dough in

Commerce One

(CMRC)

. And I think what's happening is we are at the very beginnings of an opportunity for traditional industries to be truly re-rolled.

TSC:

Do you really think technology is a place where people will find more growth with less risk?

Rohal:

There's a lot of execution risk in dot-coms, no question about it. And there's going to be more competitive risk with all the money that the venture capitalists are raising and putting to work. But I think those are still less in the aggregate form than the kind of risk that traditional industries are going to face when you truly create an exchange for their goods. The degree of competition that's going to happen when all of a sudden you say, you have to now redefine how products are identified, categorized, priced, and valued. You know that the value chain is going to dramatically shift in a lot of traditional industries.

TSC:

So what does that mean that for regular investors? Should they just own boatloads of Commerce One?

Rohal:

Well, that's a question I think that investors are asking now. I was talking to a salesperson that we were interviewing for a job in Europe. He said he woke up one morning about four months ago and said, you know, I get it. I finally get it. It's not about metrics, multiples of revenue; it's about truly the next generation of industries and the next generation of companies that are going to be worth caring about. Granted, we've driven these things to some absolutely unbelievable kind of multiples and value relationships but we're literally talking about the next hundred years of business definition. And if you don't get involved at this stage and figure out how to get involved at this stage, you're just going to feel worse and worse in each stage you know that goes.

TSC:

What upsets this scenario, or is this a highway with a lot of green lights on it?

Rohal:

Well, what upsets the scenario, obviously, is you're still investing in stocks, you know. It's not the stock market, right. You know, it's a market of stocks. So unless you're gonna do indexes, presumably it is still about picking stocks.

TSC:

Well, what we¿re hearing more and more is people don't pick stocks anymore, they pick stock sectors, so they decide what's going to be the next driver and they buy pretty much every stock in that teeny little sector.

Rohal:

I think that's what people are doing because the valuations are

all

high. There are people saying I can't pick the winners, so I believe in the Internet revolution or I believe in security, I believe in network management. You pick the theme. And you hope that the losers will be absorbed by the winners.

TSC:

But the metrics are still a mystery. It's fairly clear that P/E ratios don't work anymore and price-to-revenue is really all over the place. But do metrics not matter?

Rohal:

I think some people are trying to slice it differently. I think they're trying to say, what are the truly open-ended stories, you know, where do I have the really big markets.

TSC:

So, give us the names of the companies that you've valued like that.

Rohal:

Commerce One,

Ariba

,

(ARBA)

Broadcom

and

JDS Uniphase

(JDSU)

.

TSC:

Really, the pure-play Internet infrastructure companies, not the dot-coms.

Rohal:

Right. A lot of infrastructure but also a lot of the B2B names, you know. Where you've got

Chemdex

,

(CMDX)

look at the explosive growth because they've opened up what's viewed as some new segments and instead of just being a supplier of Web products. And the incubators, the

CMGIs

,

(CMGI)

the

ICGs

(ICGE)

. Again, it's anybody who's viewed as having such a big market opportunity you just don't have to ask what the value or what the limits are on growth. It's where you see opportunity for some number of years. And exchanges, exchanges, exchanges. ...

TSC:

And will all these changes increase volatility?

Rohal:

I think so. And you look at

Qualcomm

,

(QCOM) - Get Report

JDS Uniphase, you name it, you know all the stocks that had just huge runs and when they have a pullback, I mean it takes only a little bit of emotional change at the margin for people to duck and when you get crisis of stocks at $150, $200 dollars, you know, on a percentage basis, a 10% pullback is a 20-point move.

TSC:

So is that something people should be concerned with or not?

Rohal:

You've got to ask yourself, what am I investing in, am I investing in cap or am I investing in ideas? If I'm an investor in early stage growth ideas, you know, then I don't care about cap. I care about getting in at what I think is an early stage investment. And short-term volatility is less of a concern.

You're going to see more companies that are going to have to really figure out how to get the Internet. People are really going to have keep resorting to what they are trying to accomplish and how they accomplish it and that whole idea of consolidation and strategic change and outsource, what are they really gonna do internally. It's only just begun.

Cory Johnson files weekly from TheStreet.com's San Francisco Bureau. In keeping with TSC's editorial policy, he neither owns nor shorts individual stocks, although he owns shares of TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Johnson welcomes your feedback at

cjohnson@thestreet.com.

For more columns by Cory Johnson, visit his column

archive.