The latest round of the ongoing
selloff struck at the very heart of the Internet Tuesday.
Citing the oft-discussed trio of "softening demand, margin compression and multiple contraction,"
took a chunk out of network storage and software stocks with a series of downgrades. Led by 2000 darling
and longtime whipping boy
, Net infrastructure stocks bled 15% and more as the Nasdaq plunged 7.2%.
In his report, Robertson analyst Dane Lewis said he expects a "significant slowdown" in information technology spending in the first two quarters of fiscal 2001. Lewis identified a few "notable catalysts" for the slowdown, namely "macro-economic concerns, the absence of large IT investments from venture capitalist-backed or newly public companies, and the evaporating threat from 'new economy' dot-coms that will likely serve to slow aggressive Internet initiatives at 'old economy' companies." He also cited "the absence of aggressive Y2K spending" in the first half of 2001.
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Lewis said he believes the impact of the spending slowdown "will be dramatic enough to impact even storage and security vendors that we previously viewed as relatively immune," as "new hardware and software deployments are being delayed." Even as the likes of Inktomi were losing 80% of their value during 2000, stocks like EMC and
mostly held their ground. But with a recession and a tech spending crunch looming, lately even these onetime safe havens have taken a beating.
The Silver Lining!
But the analyst said he is optimistic that stronger buying patterns will emerge in the second half of 2001, as the "macro-economic picture" becomes "clearer" and companies follow through with infrastructure initiatives.
Indeed, as overvalued as these companies may seem to investors, it seems hard to believe they are as worthless as
, either. Internet infrastructure companies are showing real revenues, real growth, and the credible promise of profitability in the near future.
For example, Verisign had $151 million in positive cash flow in the first nine months of the year, compared to $3.5 million in the corresponding period one year earlier. According to Robertson Stephens and
International Data Corp.
, the hosting market is expected to hit $18.9 billion by 2003.
Even so, bears would note that these stocks look far from cheap. A near-20% haircut still leaves EMC and Network Appliance with triple-digit price-to-earnings ratios. That kind of signal is hardly likely to bring value investors riding to the infrastructure stocks' rescue.
Lewis' sweeping cuts included slashing his ratings to buy from strong buy on
Lewis downgraded Inktomi, which earlier suffered a
cut at the hands of
, to long-term attractive from buy.
In addition, Lewis cut his rating on
Internet Security Systems
, to long-term attractive from buy.
CacheFlow slid $3.44, or 20%, to $13.63. Certicom lost $3, or 14.7%, to $17.38. EMC was down $12.50, or 18.8%, to $54, and Inktomi traded lower by $4.31, or 24.1%, to $13.56.
Internet Security was recently down $16.25, 20.7%, to $62.19, while Netegrity fell $13, or 23.9%, to $41.38. NetIQ was down $21.31, or 24.4%, to $66.06, and Network Appliance lost $15.50, or 24.2%, to $48.69. Network Engines fell $1.69, or 40.3%, to $2.50, and Quest Software lost $5.31, or 18.9%, to $22.75.
VeriSign was lower by $14.13, or 19%, to $60.06, while Veritas lost $21.44, or 24.5%, to $66.06. Check Point Software slide $27.13, or 20.3%, to $106.44, and Prime Response was unchanged at 88 cents.