ANOTHER SILICON VALLEY RECESSION?

By Daniel Kadlec

If Andy Grove is so smart and technology companies so hot, why are Intel and just about every other tech stock falling off a cliff? Wasn't it only four months ago that our Man of the Year's company proudly sported a $100 stock? Now it's at about $70. Click on that, new-era geeks. The stock market may be chaotic and irrational from day to day, but over longer periods it's a pretty fair measuring stick for what's coming. The message here is that no boom lasts forever, and the one that Grove and tech-dom have been riding this decade is ripe for some kind of interruption.

That's not to say the pace of technological change is slowing. In fact, you haven't seen anything yet. Companies like Intel, Microsoft, Compaq, Cisco Systems and Oracle have plenty more cyber stuff on their drawing boards. What's in question is how much of it they will sell, how soon and at what price. One obvious problem is Asia. Tech companies were doing a lot of business there before the region's economies imploded. Intel, for example, has been getting 28% of its annual revenue there and will surely feel a sting from the slowdown.

White-hot competition is another part of the equation, and it's a jarring reality pretty much across the tech board. Success breeds imitators. Imitators flood the market with goods. Prices (and profits) come down. Again, take Intel. It supplies nearly 90% of the microprocessors in PCs worldwide--a more commanding grip than even Microsoft's stranglehold on PC operating systems. But to protect its position, Intel has cut semiconductor prices faster than anyone expected as rivals Cyrix and Advanced Micro Devices compete furiously to supply cheaper components for the $1,000 PCs now taking the world by storm. Intel's profit margin has eroded from nearly 63% a year ago to an estimated 58% today, says analyst Caroline Gangi at Lehman Bros. Margin erosion may be Intel's biggest problem. The company expects the figure to hit about 50% before leveling off.

Even before those obstacles surfaced, tech companies faced serious questions on the demand side. Firms have invested heavily in PCs and other "must-have" gadgets in the past few years. Sure, the stuff is really cool. But executives want to see payback before they extend the binge. It's unclear whether PCs and, say, Internet connections have made office workers more productive or simply more distracted. (Websites that seem to get the most hits are those featuring swimsuit models.) Real-world users of technology shouldn't fear that the ship is sinking. It's not. But for now tech stocks are, and investors may not get whole for a while. It's worth noting, though, that even with its recent 30% decline, Intel's shares are up fourfold in three years. Tech stocks, on average, have risen about twice as fast as the Dow Jones industrial average since June 1994. That pace was unsustainable no matter how much Grove and company may change the world.