Transcript of Lashinsky Interview on KSDO.com

<I>TSC's</I> Silicon Valley columnist talks about Internet companies, semiconductors and more.
Author:
Publish date:

Adam Lashinsky was a guest on Wall Street Review Aug. 3. The show airs daily from 6:00 to 7:00 P.M. Monday though Friday on KSDO.com. This transcript is unedited and phonetic spellings are indicated with a (ph).

Mike Green:

Adam, it's your first time on

Wall Street Review

. Why don't you tell us a little about your background and what you do at

TheStreet.com

?

Adam Lashinsky:

Sure, I'm actually the Silicon Valley columnist for

TheStreet.com.

I joined about three months ago from the

San Jose Mercury News

. I had been the tech stocks columnist and have been driving up and down Silicon Valley for the past two to three years actually visiting these companies that we hear about on the news all of the time.

Green:

For those who don't know, the

San Jose Mercury News

was breaking stories well before those folks on the right coast would ever hear of them and sometimes you'd beat them by a couple of days, right?

Lashinsky:

Talk about being in the right place at the right time. That paper was covering Silicon Valley before Silicon Valley was Silicon Valley. Now everybody knows what that means and they are right on top of it.

Jim Benham:

One of the companies you wrote about in a recent column was Ebay. This is a stock you were excited about when you were at the Mercury back when it traded at a split-adjusted price of six dollars. Now you are writing that the glow is gone.

Jim Benham:

We all know about the technical snafus they've had with the web site, but what has been less publicized was the recent conference call where they decided to cut folks out of the Q&A portion of their conference call which angered a lot of participants. Why don't you talk a little about Ebay because, obviously, this is a stock that continues to slide?

Lashinsky:

Sure and I will take you back for just a moment. People forget that the good old days were not quite a year ago. It was late July when Ebay was in registration to go public that I wrote a piece for the San Jose Mercury News saying that this thing was going to be amazing because it's profitable, it has a great management team and it was going to scale.

Lashinsky:

In other words it didn't need to do much to make a whole lot more money than it was already making as a pre-public company. Pretty unusual for an Internet company. And then of course it went ballistic over the ensuing 10 months or so and has been experiencing a slow leak ever since.

Lashinsky:

The thing about the conference call that I think is symbolic, or emblematic, is that we're not talking about some widget company or a company that deals with big businesses all the time, we're talking about a company that bills itself as having communities.

Lashinsky:

That's its very essence. Its investors are often its users and vice versa. So then, as you say, to cut people off of the call when you get to the part of the call where the real information comes out -- the Q&A -- it just wasn't a very community-like thing to do.

Green:

Do you think, taking a look back, it is growing pains on the part of Ebay? They obviously have not been a public company for very long. It's easy to get out there when things are going great and your stock price is soaring, but you've got to go through the tough times too.

Lashinsky:

Well, and let's be fair to them for a moment. When you are the leader and when you are way out in front of everybody else, everyone is gunning for you. You can't make any mistakes because people like me will jump all over your back when you do.

Lashinsky:

Whether it's a real mistake like the outages that they've had or whether it's a PR or perceptions mistake such as cutting people off the call -- which I can tell you the senior management didn't even know they were doing; it wasn't their decision.

Benham:

Now what about Internet valuations in general? We are seeing what you call a slow leak but it's leak that seems to be increasing of late.

Benham:

Today was another real terrible day, especially when you see bellwethers like America Online which had been holding up pretty solid on a lot of these dot com sell off days. What do you think is behind this move now?

Lashinsky:

Well, it's difficult to put AOL in the same -- I would make the case that AOL is what I like to call a real company. And that's a liability in times like these because real companies trade on real fundamentals and AOL faces some real challenges.

Lashinsky:

It's harder for them to experience fast subscriber growth when they get up to 17 million. They don't quite have their broadband act together. They are facing competition from people who are offering free Internet service of one kind or another.

Lashinsky:

And they make money by charging for Internet service. So this is a huge company that makes real profits and that is why it is under pressure at a time like this.

Lashinsky:

As far as the rest of the Internet sector, it's so hard to call because you have companies with a few tens of millions of revenues that are worth more than a billion dollars.

Lashinsky:

We knew they weren't worth two billion dollars. We have a sense they aren't worth one billion dollars. We don't really have any clue what they are worth though.

Lashinsky:

So your going to have times like this week where there's a variety of factors, including simply the summer slowdown when people aren't using the internet as much when they are going to start to lose their value.

Green:

Is that what this is really coming down to? Is this a simple valuation story where the market is becoming more discerning about, as you call it, the real companies versus those companies where we don't even know if these companies will be existing in three, four five years from now, at least in their present state?

Green:

Do you get the sense that finally people are tired of stories and how many hits and don't they want to see some profits at the end of the day?

Lashinsky:

The truth of the matter is I don't know. The comment you hear here in Silicon Valley all the time is tiering. People talk about the first tier and then the second and third tier internet companies.

Lashinsky:

The assumption is the first tier will continue to do well, will survive for the long haul and that their stocks over the long term will continue to go up. But, over the past couple of weeks you haven't seen any tiering in the decline --- they've all been coming down quickly. I believe in the tiering but we haven't seen any evidence of it in the stock market yet.

Benham:

American Online is company we talk about quite a bit on the show, we get lots of calls about it. It's really becoming a bellwether kind of blue chip company, not just for the internet, but for technology overall for a lot of blue chip money managers.

Benham:

One thing Mike and I wonder about is AOL's broadband strategy. As a former user, I loved it when I had a 28,800 modem I thought it was the coolest thing on the planet, but now that I have a DSL line, I find very little use for paying premium to go into some gated community on the Internet.

Benham:

Is this a company that can make that shift? It seems like such a monumental shift for them to have to make.

Lashinsky:

I think it's a huge challenge, personally. They are students. . . . they are two things. They are students of business history and they're very shrewd business people. So they have to figure out how to solve your problem. They need to make you happy. I'm convinced they're at work on that.

Lashinsky:

They have tremendous financial resources -- already they are working with satellite companies, already they are working with phone companies. They'll want to try to make it economical to keep you as an AOL customer with your DSL service.

Lashinsky:

And don't be surprised if you see a very big strategic shift in terms of their working with cable companies. It's not out of the question; we just haven't seen it happen yet.

Lashinsky:

And I'll make one more point. They're terrific at getting the newbies, you know, the people who aren't on the Internet yet. It's really their bread and butter and I assume they'll continue to do well with the newbies.

Green:

Adam, let's talk a little bit about the big strength in the semiconductor area. This seems to have been started off by Intel. Drew Peck made very positive comments. He is still considered by many to be the ax when it comes to Intel.

Green:

And that kind of ignited the semiconductors right across the board. Are these stocks back? Are they for real going forward? Are they finally emerging from sort of the malaise that a lot of these stocks have been in for the last two or three years?

Lashinsky:

Yes. Based on the people that I spoke to, especially last week, there is absolutely no question that they're back. The only question is how far they've got left to run.

Lashinsky:

The semiconductor sector went into just an awful span over the¿ ending about a year ago for the previous two years. That was based on too much capacity, to weak pricing and obviously an economic disaster in Asia.

Lashinsky:

It was so bad that people were wondering if the industry was ever going to come back. That turned out to have been a bit shortsighted and a bit silly and in fact many of the better companies have come roaring back.

Green:

What's the best way to really work this area? The chip companies and the different areas inside the chip industry are all very different. You have Intel, which is obviously involved with the microprocessors, but you can't just deal with the brains of that area.

Green:

Obviously AMD and National Semi now that they've bought Cyrix is not the same as buying Intel. And then you go into other types of logic chips and there are the haves and the have-nots.

Green:

Then you have the memory area where the pricing in memory will just drop out and seemingly never come back and those companies tend to struggle as evidenced by the ups and downs of Micron Technology for one.

Green:

Don't you agree that it's tough to talk about the chip stocks as if they're one in the same and how can investors differentiate these areas?

Lashinsky:

Well, you've raised about 18 great questions. Let's try to do one of two of them right? I think what's interesting is that as recently as a year ago a lot of very smart people were questioning Intel's staying power. That turned out to have been a mistake.

Lashinsky:

The argument wasn't silly; the argument was that the commoditization of the microprocessor long-term was not exactly a losing business but not a great business. That was sort of like betting against Microsoft. In other words, Intel's a great business so if Intel goes down it's something that the average investor wants to have in their portfolio.

Lashinsky:

I would argue that memory is just a real difficult thing for the average investor to have in their portfolio because the pricing is so sensitive. I'm not saying don't own them, but I'm saying that if you don't have a good handle on DRAM pricing -- and I don't for example -- I'd be a little nervous about trying to play, if you will, Micron Technology.

Lashinsky:

What has worked extremely well is people who have looked at the end markets. Over the past year at least, people who have invested in the companies that have been focused on the next generation of communications devices have done extremely well. So chip companies like Broadcom or Xilinx or PMC Sierra -- I'm just throwing out a handful of the most obvious plays in the communications chip business.

Lashinsky:

It was sort of a no-brainer that communications were going to continue to do well and it's probably equally a no-brainer that they'll keep doing well.

Benham:

We should point out too, that we are owners of Intel. Let's shift gears and talk a little about Y2K. It looks like fears are subsiding about Y2K. What are thoughts on this?

Benham:

Do you think there will be some pent-up demand for hardware and software once Y2K is behind us and people realize that Rose Parade is on and that ATM machines work and that the world hasn't come to an end?

Lashinsky:

Enterprise software companies -- these are the kinds of companies that sell software to businesses, they're not the kind of software companies that you and I might go out and buy a software package from. These companies tend to trade out on their valuations say one, two or even three quarters ahead of what they are doing right now.

Lashinsky:

So once people realize that big businesses just weren't going to be buying this stuff from about the second quarter of this year on through the end of it, their stocks collapsed. They just totally went into the can.

Lashinsky:

The same sort of realization process is probably going to happen, beginning sometime around now and then toward the end of the year. All right, we know the rest of 1999 is going to be terrible for this company -- that's in the stock.

Lashinsky:

Now we have to try to figure out what will happen when businesses say that they've put off this discretionary spending on enterprise software and now we need it. And it's all going to be new stuff, highly e-commerce oriented, so some of these companies will start to take off again. It's a real dance as to when and how much, but there's a bunch of them that are dirt-cheap.

Green:

Give us a few names. Who are some of the leaders in the enterprise software area?

Lashinsky:

The fallen star of the enterprise software industry is PeopleSoft up here in Northern California. It's still trading around $13 a share because they really don't have their act together still. If they get their act together, my sources tell me it would be a company that would take off extremely well.

Benham:

A lot of internal problems there too, right?

Lashinsky:

They have a brand new CEO. I think people haven't paid enough attention to him. He's from Oracle. There are no two different cultures in software companies than PeopleSoft, which is a very touchy-feely people-oriented place on the one hand, and Oracle, which has a very go-go sales mentality, on the other. It'll be very interesting to see how he shakes up that culture.

Green:

After you get by the PeopleSofts and things like that, are there any hardware companies who may have been lagging here -- the thought being that a lot companies are not going to add new components as they go through their Y2K testing. Do we have that PeopleSoft kind of problem on the hardware side, too?

Lashinsky:

It depends on whether you are talking about people who build products for the Internet, or people who build products for absolutely anything else. Because the companies that build products for the Internet -- take for example Sun Microsystems or Cisco Systems, or even IBM and Hewlett Packard -- are selling what many businesses think are mission-critical products.

Lashinsky:

And the world could be coming to an end and ACME widgets in Ohio needs to get up it's intranet so that its suppliers can buy widgets from them or supply them with widgets for their widgets and Cisco is going to sell them the equipment to do that. Period. So that's why you've seen Cisco do so well.

Green:

We're almost out of time. When it comes to the Internet stocks are we just at a point here where investors ought to wait and see?

Lashinsky:

It depends on what kind of stomach you have.

(Laughter all around)

Green:

Good answer.

Benham:

What are you writing about now? What's your next column about, if you don't mind giving us a scoop?

Lashinsky:

I'm writing on this very topic and I'm taking the pulse of the Silicon Valley VCs today. And you know, publicly, to me, they are cool customers. When I talk to their pals who then tell me what they said they're pretty scared.

Benham:

We'll look forward to about reading that. And to all of our listeners, if you haven't read what Adam has been writing on

TheStreet.com

, you should check it out because it is very much worth your while. And it's always fun to read to -- not just boring analyst drivel.

Green:

Thanks a lot Adam.

Lashinsky:

Thanks guys.