Stock meltdown hits tech harder than most
- 28 September, 2008 22:00
Worries about consumer spending, advertising and the ability of IT companies to raise money appear to have hit many tech stocks harder even than the overall market on Monday, one of the worst days on Wall Street since 1929.
The Dow Jones Industrial Average fell 777 points, or 6.98 percent, to 10,365.45 as the U.S. House of Representatives rejected a plan to bail out financial markets. But the tech-heavy Nasdaq lost 9.14 percent, falling 199.61 to 1983.73, and shares in some of the biggest names in technology fell even more steeply: Apple (AAPL) nearly 18 percent, Advanced Micro Devices (AMD) almost 17 percent, and Intel (INTC) more than 10 percent. Google (GOOG), which has flown higher than most, went down $50.04 to $381 a share, losing 11.61 percent of its value in one day.
Fear that nervous consumers are losing their appetite for discretionary spending was one factor that slammed Apple. In a report released Monday, RBC Capital Markets lowered its rating of Apple from "Outperform" to "Sector Perform," in part because of research that said fewer consumers intend to buy Macs in the next 90 days. In addition, 40 percent of consumers plan on spending less money on electronics overall in the next 90 days, the weakest outlook ever seen, according to RBC.
"Apple's business is driven by the consumer, and the consumer is getting hurt because of higher oil prices" that leave less money for cool gadgets, said Trip Chowdhry, an analyst at Global Equities Research in San Francisco. Large enterprises, such as airlines and shipping-dependent retailers, also have less money to invest in IT, he added.
As consumers go, so goes advertising, according to Albert Lin, an analyst at investment firm Sooner Cap. When companies grow less confident that consumers will buy their products, they don't want to spend as much on advertising. That can affect companies such as Google, which depends heavily on how much it can charge companies for search advertising, he said.
But tech's woes are broader than that, according to Lin. Compared with businesses in general, IT companies both need more cash and have less of it on hand, he said. Giants such as Apple and Google, with their large cash hordes, are exceptions to the rule, he said. Most operate close to the bone, investing most of what they bring in just to keep up with technology, and often need to borrow capital.
"Now, the access to capital is much harder," Lin said.
Lacking solid collateral and a good cash-flow history, tech companies usually can't turn to conventional lenders such as banks when they need to borrow, Lin said. So they typically turn to investors and recapitalize, selling more stock, Lin said. Bad news, such as the rejection of the bailout plan, makes those potential investors skittish.
"When all those unknowns are thrown into the market, people conclude the stocks have become more risky," Lin said.