Can Microsoft rescue the technology economy? Some savvy investors think so. The theory is that the introduction of Windows XP on Oct. 25 will be met with a surge of related personal computer sales, first to businesses and later to consumers. To take full advantage of XP, the thinking goes, will require not just an upgrade but also new hardware.
If the theory is right - and you certainly wouldn't know it from the recent news out of the PC industry, where demand has been sinking and prices sliding - then XP could also boost a range of related companies. Beneficiaries could include chipmakers, disk-drive companies, flat-panel display producers and, by extension, companies further down the food chain like semiconductor equipment firms and contract manufacturers. Let's be clear: We're not willing to believe that XP will provide tech investors with a magical cure. But it could provide a little succor to the wounded sector. And right now, even a modest indication of improving conditions could give these stocks a lift.
Christopher Nawn, a portfolio manager at Technology Crossover Ventures in Palo Alto, Calif., thinks the first evidence of an XP-related uptick could come as early as July, as PC makers begin to boost component orders from Asian suppliers in anticipation of improved business in the fall. Indeed, Nawn says, there are already signs of a rise in demand at some Taiwanese motherboard manufacturers.
But does anyone really want or need the new operating system? Yes, Nawn contends. Windows XP, he says, will be faster and more reliable, and will offer better integration of the Internet with applications.
Investors will be able to play the cycle in a number of ways, Nawn says. The increased need for components should give a boost to the semiconductor foundries, such as Taiwan Semiconductor and UMC, which have tremendous capacity now going unused. Contract manufacturers such as Flextronics, Jabil Circuit and Solectron also stand to gain with a pickup in PC demand.
Mercury Interactive should start to see an upgrade cycle kick in for its test software three to six months out, Nawn says. Intel should benefit, as will Micron Technology - Nawn figures the average PC next year will ship with 50 percent more memory than the current standard PC.
And at some point, he adds, the new applications running on XP will bog down networks, leading to network upgrades, which will lift the fortunes of Cisco as well as its suppliers.
David Readerman, a software analyst with Thomas Weisel Partners in San Francisco, believes the spillover effects from XP should be real, but limited. He says Intel and Micron should benefit, along with Best Buy, the leading PC retailer. To that list he adds "probably Dell" and "maybe VeriSign," a supplier of security services. Who will be the biggest winner? Why, Microsoft of course, he says.
The impact from XP can be modest and still provide a lift to tech stocks, says Nawn. "In this negative climate, all you need is a pulse and people will go there and park their money," he says. "Tech is a year into the decline. They were over-owned, and the fundamentals were bad. We're at the worst period, but things will get better."
Nawn cautions, though, that investors will need to be selective. "I'm not arguing you should own 300 names in tech," he says. "For the next 12 months, the indexes will look sort of flat. But buy the right 10 to 15 names, and you will do well."
