Stock prices plunged at yesterday's opening after IBM surprised investors with a warning that Y2K fears were already hurting sales of its high-end servers, but the market recovered somewhat as bargain-hunters snapped up beaten-down technology stocks.
The Dow Jones industrial average -- which fell to 10,229.62 by midday, down more than 160 points -- bounced back to close at 10,297.69, a loss of 94.67 points. International Business Machines, heavily weighted in the Dow, was responsible for 80 points of the loss. Its own stock price fell $16, to $91.
IBM had said after the close of Wednesday's trading that businesses were postponing purchases of its products until any lingering questions about year 2000 computer bugs are answered. The company reported third-quarter earnings of 93 cents a share, meeting analysts' expectations, but said earnings would be hurt in the next two quarters by as much as 15 to 20 cents per share.
The warning initially had a knockout effect on other technology stocks. At one point the tech-heavy Nasdaq lost 22 points from the previous day's close, but managed to close 13.82 points higher at 2801.95. Microsoft touched a low of $90.50 but closed at $93.06 1/4, marginally up over Wednesday's close of $92.50. Intel also sank to a low of $67.87 1/2, but rallied to finish the day at $71.68 3/4 against the previous close of $69.93 3/4.
IBM competitor Sun Microsystems also was affected, falling $3.50 to $92.81 3/4. Dell Computers was down marginally from $40 to $39.50, as was Hewlett Packard, which slipped to $75 from the previous close of $76.56 1/4.
Not all technology stocks suffered. America Online, which on Wednesday reported its fiscal first-quarter earnings had tripled and announced an $800 million investment in PC maker Gateway, rose $4 to $122. Gateway jumped $10.50 to $62.50.
Analysts said the market reacted so negatively to IBM's disclosure because until recently the company had denied that it was feeling any Y2K effect. "The announcement comes out of the blue," said Ulric Weil, senior technology analyst at Friedman Billings Ramsey. IBM "never ever alluded to it 'til the end of the quarter."
A research report on IBM put out yesterday by Salomon Smith Barney said that IBM believed 70 percent of the world's business data was managed by its servers and that managers of these data centers were wary three months ahead of the dreaded changeover. Companies have invested millions of dollars making their computer systems Y2K compliant and are putting off fresh purchases until the clock safely ticks past year 2000.
"Buyers are waiting to see how their current systems come through Y2K before investing in expensive top-end servers," said Shebly Seyrafi, enterprise hardware analyst at A.G. Edwards.
IBM officials said its problems would be temporary. The company's chairman and chief executive, Louis V. Gerstner Jr., said yesterday that next year had the potential to be a very good one for the company once it was "past any lingering Y2K effects."
That opinion was echoed by Smith Barney analyst John B. Jones Jr., who said that while he was not "thrilled with this event," investors should view the drop in IBM's stock price as "the ultimate one-time event" and a buying opportunity.
Some analysts suggested that IBM was exaggerating the effect of Y2K on its sales. The real problem, they say, is that IBM needs to rethink its product lines. Indeed, the company is making an effort to focus on information technology services, where profit margins are better than those of hardware.
Although the demand for expensive servers may have slackened, analysts say, sales of personal computers are robust. The industry estimates that 15 million to 20 million PCs will be shipped this year, up 20 percent over 1998. But shortages in the supply of memory chips and other components have forced PC makers to cut into profit margins by buying from spot suppliers.