The Nasdaq stock index has climbed about 50 percent in the past two years, still not even near to its highs during the Internet boom, but enough to instill a dose of optimism. Lately though experts are warning that the comeback, rather than a beginning, could be reaching its peak. “The index as a whole may be in for tough times,” said Scott Merritt CFA, an equity strategist with JP Morgan Funds, who spoke recently at the Santa Clarita Valley Real Estate and Economic Outlook conference sponsored by First American Title Co. “If companies in Nasdaq grow their earnings at 10 percent, it’s hard to see Nasdaq going up (a lot) in the next five to 10 years.” Many of the technology companies that make up the majority of listings on Nasdaq are maturing, and, as their prospects for profit growth slow, so too will their value on the market, these experts say. Of course, there are pockets of technology that are not likely to be part of the projected slowdown. The medical and biotech sectors, including companies like Amgen, companies offering services for electronic payment, those who sell business applications and even some Internet stocks, although not all of them. But by and large, say analysts, there is a slowdown ahead in stock values for the very companies that fueled the market over the past 20 years. “All markets mature eventually,” said Robert V. Green, investment strategist for Briefing.com. “You have a huge growth era, which, for tech stocks has really lasted since the PC was first invented. But I think what you’re seeing now is that the large corporations that have driven the revenue of most technology companies is maturing.” What fueled the Nasdaq for so many years was the move by corporations to computerize, first with PCs and later with networking, and the whole home computer revolution. Looking for returns But now, most homes have PCs, and corporations have built their systems. “Companies have built the information technology systems they need to run their business,” said Green. “It’s a return on investment approach. They’ve made the investment and now it’s time for the return.” Analysts concede that they have been warning of the approaching slowdown for some time, and still Nasdaq stocks, in general, have been growing. Locally, many of the greater San Fernando Valley tech companies have seen considerable increases in their stock values over the past two years, in most cases, consistent with the overall growth of the Nasdaq. In the semiconductor sector, Diodes Inc., currently trading in the low $20 range, has risen from the $7 to $8 range in early 2003. Shares in Tekelec, now trading around $20, have climbed from the low teen range two years ago. Even Vitesse Semiconductor Inc., which has struggled of late, trading in the $3 range, is up about 50 percent from levels around $2 in 2003. The story is the same in other sectors. Shares in Digital Insight Corp., a provider of Internet banking software, have increased more than 50 percent over the past two years. And THQ Inc., a video game developer, is trading in the low $20 range, nearly double its levels early in 2003. But experts say it’s not so much a question of whether some of these stocks will hit a ceiling, just when. Nasdaq stocks are averaging a price to earnings ratio of 27 percent, compared with a ratio of under 16 percent for the S & P; 500. “That’s a very high multiple if you are not expecting growth in the 20 percent range long term in those stocks,” said Merritt. Vendors of platforms such as Microsoft and those who develop in what is called the tools sector, like Oracle’s database systems, have few new markets to conquer, and they will find themselves with significant competition for the customers they do get. “In five years, platform and tools domain vendors I think are going to be under extreme pricing pressure,” said Green. “The stocks of the company are going to start to get flat or go down because the multiple the market will be willing to give is going to go down.” Application software Green sees the brightest future for those who develop and provide application software, products that solve business needs like those provided by PeopleSoft, and he believes companies not now in that sector of the business will rush to acquire these application makers, a trend that may not bode well for the smaller cap companies that supply them. “I don’t think the consolidation of the software companies benefits the companies that sell services and products,” he said. “It’s not a bad business to be a supplier to General Motors, but you’re at their command.” Semiconductor companies, on the other hand, may find a number of new markets opening to them and considerable growth prospects ahead because of the proliferation of consumer electronics products. Also likely to affect future growth is the awakening of China and the potential market it represents for these technology companies. “There are a billion folks lining up to buy cell phones in China,” said Merritt. “We can’t forget there is this potential new market out there.” Still, Merritt adds, “I don’t think we’re going back to the 40 percent, 50 percent growth environment.”
