Five and Under

[ToshacH]

I got this article sent to me today about techs


The Goldman Sachs Global Technology Team has culled together valuable data
that we believe are relevant for investors today. Our basic message: tech
stocks may be closer to a bottom than not but are probably still too early
to be bought heavily, particularly with estimate changes - which we are
making many of today - still in downward revision mode. We are seeing
increasing evidence of just how severe the U.S. economic slowdown has
become and how little visibility companies have right now. Notably, the
slowdown has spread to all parts of the tech sector and, while not yet
affecting every company in technology, those few that are still unaffected
face widespread skepticism about just how long they can hold out. The
Nasdaq Composite Index has now fallen 54% from its high on March 10, 2000
and the GSTI Composite Index is down 55% from its March 27, 2000 high. At
the same time, there are growing questions as to what happens next and
whether it is time to start buying technology. With that in mind, we have
put together our thoughts under the following 9 conclusions, including a
series of exhibits that we hope will help to capture some of the more
relevant data:

1) WE EXPECT THE SLOWING TO LAST BEYOND H1 SINCE THERE IS NOT YET ANY
EVIDENCE TO SUGGEST THAT BUSINESS HAS TURNED UP. Business has been
generally weaker than we expected. Indeed, many of the companies we speak
to indicate that business is continuing to decelerate as customers cut back
on the size of orders or defer them. As a result, companies have been
working harder to pull in business, with evidence of this coming in rising
DSOs for many of our technology companies, as we show in one of our
exhibits.

2) THE POSSIBILITY OF THIS SPILLING INTO INTERNATIONAL MARKETS, EVEN IF NOT
AS DEEPLY AS IN THE U.S., BECOMES MORE REAL THE LONGER THE U.S. SLOWING
LASTS. There are already some data points suggesting anecdotal or isolated
areas of slowing in Europe or Asia, mostly related to the communications
markets. While we are not predicting that Europe will get pulled into this
slowdown, we are concerned because, right now, Europe - and Asia to a
lesser extent - are generally holding on as major drivers to growth for
many technology companies, offset by seriously weakened demand in the U.S.
As a result, we have put together a geographic exposure exhibit that spans
the various tech sectors, with the list moving from those with the greatest
exposure to those with the least.

3) MOST COMPANIES HAVE VISIBILITY THAT EXTENDS INTO THE NEXT COUPLE OF
MONTHS AND NO LONGER. As a result, companies that have suggested that they
are likely to see meaningful upturns in the second half of 2001 and
estimates reflecting that are almost certainly going to need some sort of
adjustment.

4) WE ARE IN FOR FURTHER, DEEPER ESTIMATE CUTS. We have already seen
widespread downward adjustments to earnings across most tech sectors. We
think this is only the beginning. Recent announcements from companies such
as Motorola and Sun Microsystems have made it clear just how much many
estimates may need to come down by. Until they do, many companies will
still be facing the prospect of missing numbers. Unfortunately, this is
also adding to the uncertainly of stock valuations, making it difficult to
call the bottom even though some stocks seem very tempting at this point.
We have provided a lengthy list of names across our tech group where we are
making estimate cuts, with many of these names already having gone through
multiple rounds of revisions.

5) COMPLICATING THIS ECONOMIC SLOWING IS THE FACT THAT THERE IS CLEARLY
SOME OVERCAPACITY IN THE SYSTEM AS A RESULT OF ABOVE TRENDLINE SPENDING IN
THE COMMUNICATIONS MARKET. While we don't know how much overcapacity there
is, it will have to be re-absorbed before we can go back to normal growth
rates in some sectors. For example, rough guesstimates suggest that, if
this overcapacity buildout conclusion is correct, companies such as Cisco
and Sun, among others, may have gotten a tailwind that could have added as
much as ten percentage points to their 2000 growth. Yet another of our
exhibits shows the percentage of business across the tech sectors coming
from this market.

6) THE 'CLEAN AS A WHISTLE' COMPANIES LIST IS GETTING SMALLER AND SOME OF
THOSE WILL PROBABLY END UP GETTING PULLED INTO THIS SLOWING WAY ONE OR
ANOTHER. Most of these remaining names are in the software and services
sectors. Over the next few months, some of these companies - we wish we
could tell you that we know which ones - could end up falling off the list,
either because of suspiciously rising DSOs or some other yellow flags.
Judging from the stocks, investors have been pretty gunshy about many of
these companies for some time, even those where there is continued evidence
confirming their current strength. We've provided a list of these
companies as well.

7) PEG RATES AND MULTIPLES CONTINUE TO HEAD SOUTH. In the last couple of
years, momentum companies routinely carried PEGs in the 3-4x range.
Software names were even higher. In recent quarters, PEGs have come down,
with many now ranging just below or above 1. While these are comforting
levels, in the meanwhile earnings have grown more uncertain, suggesting
that, while the PEGs may be reasonable, the earnings they are based on
often are not. Absolute multiples are also coming down, in some cases
closing in on historic pre-Internet hype levels. While we don't know
whether we will quite move back to these levels, we are mindful of the fact
that in pre-Internet days, companies whose growth was above 50%, even well
above 50%, often saw their P/Es discounted back to around 50x. Given
current circumstances, we have also put together an exhibit showing PEGs
and absolute multiples for those companies whose PEGs, based on 2001
earnings estimates, are still at or above 1.5x or whose absolute multiples
are above 50x.

8) WE DO NOT THINK IT MAKES SENSE TO TRY TO BE A HERO AND BUY THESE STOCKS
TOO EARLY. Although the fact that last year's love for tech stocks has
been replaced with an equal amount of hate and that some names are
approaching levels that seem very tempting for investors with a 12-month
horizon, we think there is still some time. The brief rallies we've seen
seem to be aborted fairly quickly as we face the next round of cuts.

9) STOCKS WILL TURN AHEAD OF THE FUNDAMENTALS. Depending on how much is
discounted into the tech tape by then, this could come sometime in the
summer period although there are many issues to be resolved before we get
to this point.

Important Disclosures (code definitions attached or available upon request)
MSFT : US$ 59.56; CF, CS, M, SP1, SP2
IBM : US$ 105.30; CF, M, SP1, SP2




Prepared Tue 27 Feb 2001 16:23