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  1. Technology
October 8, 1998

TECHNOLOGY STOCKS TAKE A BEATING, AGAIN

By CBR Staff Writer

Shares in technology companies fell across the board for the fourth consecutive day on Thursday with heavy declines seen in many of the sector’s biggest names. The technology heavy Nasdaq Composite Index was down a frightening 6% mid-way through Thursday, only to stage a late recovery, closing down 2.97% at 1419.12. But despite this late rally, technology stocks remain under severe pressure as investors flee from the perceived risk inherent in these stocks. So far this month, the Nasdaq Composite Index has dropped by around 16%. By comparison, the Dow Jones Industrial Average has fallen by just 1.4%. Technology stocks have been amongst the most highly-valued on exchanges around the world, with valuations commonly running to 60 times future earnings. These stocks were often cited as the driving force behind the record market gains seen this summer, and now they are dragging the markets back down again. And while leaders like Microsoft Corp and Cisco Systems Inc had until recently been spared the treatment meted out to their less illustrious rivals, nothing now seems to be sacred. Heading up Nasdaq’s most actively traded list for the entire week have been the big name companies which led the market to its former highs, namely Dell Computer Corp, Microsoft Corp and Cisco Systems Inc. Looking at October alone, Microsoft is now down 17%, Cisco is down 25% and Dell has plummeted by 26%. With the former rocks of this sector now crumbling, its not hard to see why investors are falling over themselves to get out. However, short-term fluctuations in the value of a company’s stock price have little or no impact on its day-to-day business. What remains to be seen is how a Silicon Valley culture, weaned on inflated share options and the lure of the quick IPO, will fare in a long and grinding bear market. Should stock prices fall into an extended downward spiral, companies whose employees form the better part of their remuneration from cashing in share options will suddenly find their incomes cut in half. That is, unless their employers can afford to fill the void with good old fashioned cash. The problem is, however, that remuneration via share options is invisible to reported earnings, while remuneration via salary is not. If technology companies are forced to pay through the nose in order to hold onto their best employees, we could see a substantial reappraisal of the earning potential of large portions of the technology sector.

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