So rising interest rates aren't hazardous to tech stocks' health. For now, at least.
That was the lesson investors learned Thursday, when the
jumped 4% in the face of rampant premarket fears that inflation data would shred tech stocks. Coming only two weeks after unpleasant inflation data
lopped 10% off the Nasdaq in a day, Thursday's activity suggests rising interest rates may not hurt tech stocks as much as you might have expected. Friday saw a continuation of the warming trend, with the Nasdaq rising more than 1% in early action as nontech stocks pulled back slightly.
All the same, say buy-siders and others in the market, the pressure is on earnings-light dot-coms to start making money quickly or get weeded out of investors' portfolios.
"Spec tech" -- speculative technology stocks, that is -- "will not re-emerge for a while," says Chris Clark, a principal of
Covenant Capital Management
, an asset-management firm specializing in growth stocks. Investors won't buy into companies, he says, "until people get a sense that you are cash-flow positive."
Oy, the Pain
The perception is that Internet stocks -- most of which are unprofitable --
suffer as interest rates rise because people seek investments that generate cash now, rather than wait for future profits whose present value diminishes as rates rise. Tech firms typically don't pay dividends, for instance, and many dot-coms are burning cash rather than generating it.
In fact, some observers fear that if interest rates go too much higher, all tech stocks will get hurt. "I ask myself, what could wreck the market?" says one buy-side analyst, speaking on condition of anonymity. A rise of 25 basis points in the
funds rate is a foregone conclusion, the analyst says. But if rates rise another 75 basis points after that, "I think it would have very dire consequences," says the analyst. "I guess like everyone else, I'm jittery about it."
And yet the buy-side analyst doesn't see any direct connection between interest rates and demand for technology. "Because the Fed changes interest rates, my usage of the Internet changes not one iota," the buy-sider says. Similarly, the analyst doesn't see that interest rates are any drag on the capital spending that has driven Internet stocks -- for example, the rate at which companies orders routers from
Mind the Gap
Indeed, the direct effect of rising interest rates on most Internet companies and tech stocks is minimal, says Joe Grabias, chief financial officer of online direct marketing firm
. That's because most Internet outfits haven't been big issuers in the debt market, which is most directly affected by interest-rate changes, he says.
But, Grabias acknowledges, as interests rates rise, investors will be seeking investment alternatives. And just as stocks got
whacked in late March when
strategist Abby Joseph Cohen recommended cutting back on equity exposure, Grabias expects further rate rises will have buy-side professionals weeding the less-profitable and riskier companies out of their portfolios so they can put their money elsewhere.
"I think it's going to be much more important for you to become profitable, or to show that you have a clear path toward profitability," Grabias says.
Circle of Life
The rate-rise picture isn't equally pessimistic across the tech board. Some market strategists say that in a high-interest-rate environment, investors will
pay up for big tech's strong growth. Meanwhile, higher interest rates will immediately hurt old-line companies like
, says Clark. As a result, he suggests, investors will likely rally around a company like Cisco.
Or, says Clark, investors might be willing to take a flier on a firm like
, a biotech that Clark offers as an example of a company that may be close enough to profitability to suit investors' increasingly picky tastes. Of the stocks he mentions, Clark's firm owns only Cisco.
Other buy-siders, though, say they're avoiding the whole interest-rate issue. If you try to figure out what the effect of interest rates are on various tech sectors, says another anonymous tech analyst, "You really just end up arguing in circles."