High Tech's Hazy Horizon

Despite a Downturn, Online Revenue Gives Companies a Cushion

Until a few weeks ago, this looked like a banner year for technology stocks. In the fall, the initial public offering of software-maker VMware, rose 80 percent within the first few hours of trading. In October, Microsoft bought a 1.6 percent stake in social-networking site Facebook for $240 million.

But as stock markets worldwide churn amid concerns about subprime lending, technology stocks have taken a hit. Network-equipment maker Cisco, for example, forecast tepid performance citing a "pretty dramatic" decrease in demand from financial institutions.

So were the past few weeks a minor stumble for tech stocks? Or should investors brace for a repeat of the dot-com bust?

Though there are some skittish doubters, many financiers, entrepreneurs and analysts in high-tech point to evidence that the situation is different this time. Stocks are not trading at as high a multiple of earnings as they did seven years ago, investors are putting less monty into each venture and many of the new companies have narrower ambitions focused on a practical niche.

What is fueling the boom this time around is a surge in online advertising, the release of a new generation of consumer products and rosy earnings forecasts from some of the largest Internet companies.

There are 1.3 billion people using the Internet, compared with 100 million in the late 1990s, meaning there is a base for business plans that were speculative just a few years ago, said Paul Saffo, a longtime technology forecaster. "There's none of the frothy sort of amateurish investing we had before," he said.

Shares of companies like Google, Apple and BlackBerry maker Research in Motion hit all-time highs, but stocks in the information-technology sector are trading at about 24 times their earnings, compared with 71 times earnings at the height of the tech bubble seven years ago.

"Investors have adopted more of a 'show me the money' or 'trust but verify' attitude and are not willing to go out on a limb on promised earnings," said Howard Silverblatt, senior index analyst with Standard & Poor's.

VMware, for example, is not the inexperienced dot-com of yesteryear. The Palo Alto, Calif., company, whose leadership is made up of seasoned executives in their 40s and 50s, has been profitable since 2003 and provides technology that allows computers run more than one operating system.

With its practical product, VMware represents a kind of shift in strategy for Silicon Valley, which has been about big ideas since its early days as a government-research center for radio and military electronics.

Historically, the more maverick the goal, the more scientist-entrepreneurs in the valley were willing to take part. In the 1990s, for example, nearly every plan scrawled on a white board that involved e-shopping secured funding. In part, that was what made this fertile ground for the semiconductor, the home printer, the Internet browser, and e-commerce, which were nurtured here until they were ready for the masses.

In the years since the bust, which wiped away billions of dollars in stock-market value and led to mass layoffs, the region has developed a sense of caution. Now, industry watchers say, there are fewer illusions that you must change the world to make money. Nowhere is that change more evident than among the venture-capital firms that finance companies at an early stage.