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Stockwatch: 1989.

STOCKWATCH: 1989 In June, we gave up our regular quarterly review of public company stock prices, after concluding that the numbers were no longer a symptom of interesting trends. "In effect, we're looking at a bunch of unique companies in unique markets, not an interconnected industry," said our mythical Deep Broker as he headed into well-deserved retirement.

Nevertheless, Wall Street is a subject we can't ignore. All but seven of last year's top 25 Soft*letter 100 companies are now public (Electronic Arts and Symantec joined the club in 1989), and we're pretty sure a few of the remaining holdouts will take the IPO plunge in 1990. Once a software company reaches about $20 million in annual sales, the decision to go public seems almost inevitable.

In theory, this movement toward public ownership of the industry's major players should be a healthy trend. Investors like to know that eventually they can turn paper profits into real cash, so a flourishing stock market always helps liberate money for startups. (If a company doesn't look like it can reach the $20 million level, of course, venture money dries up quickly.)

But Wall Street's day-to-day influence on the industry hasn't been quite so positive. Institutional investors and analysts exert relentless pressure to keep quarterly revenues and profits moving steadily upward, even though actual marketplace demand may fluctuate erratically (Soft*letter, 10/24/89). Ashton-Tate was certainly the most conspicuous example in 1989 of a company that got in deep trouble by trying too hard to please Wall Street--but Tate wasn't the only company to rush an incomplete product out the door, stuff the distribution channel, or lay off talented people to achieve quick-fix cost-savings. Wall Street imposes real no-excuses discipline on public companies, but that same discipline often pushes senior managers to make some pretty shortsighted decisions.

So how did the stock market judge software stocks in 1989? If we look at a simple unweighted average of the 20 NASDAQ National companies we follow, the results show a respectable 24.88% gain over 1988. (By comparison, the NASDAQ Composite index rose 19.26% for the year, while the Dow Jones Industrial Average moved up 26.96%.)

But among software stocks last year, the rising tide definitely didn't lift all boats. In fact, the range of price movements was remarkably broad, with gains as high as 198% (Software Toolworks) and losses as deep as 74% (Phoenix). Moreover, it's hard to see symptoms of any trends in these price movements. The top three performers of the year were relatively small consumer software companies, followed by Lotus, Microsoft, and Autodesk. Eight companies--including 1988's two best Wall Street performers, SPC and adobe--finished 1989 with a significant decline over their 1988 year end values. If there's a hidden message here about the financial state of the software industry, we'll have to wait until someone slips us the password.
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Copyright 1990, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Date:Jan 10, 1990
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