Steve:
Hope you had a good holiday! Great foresight on the puts! Here's some general market info, with more to come...
Also, happy holidays and a successful and peaceful 1998 to you!
K.
SNAPSHOT/December: What In The World Is Going On With the Computer Business?
08:16am EST 15-Dec-97 Bear Stearns (Neff,Andy / Wu,Shaw)
Let's Take A Trip Around The World
It depends on where you look, but we think that computer demand
overall will be fine next year - i.e., grow 15%-20% -- with
continued growth in the U.S. and a pickup in Europe offsetting
the weakness we expect to see in Asia/ Pacific. Let's take a
look at the trends by region (going in descending order according
to share of the world:
U.S. (38% of 1996 global sales): We expect to see continued
strength in the U.S. owing to gains in servers and a possible
pickup in notebooks. We would anticipate continued gains from
consumer in view of lower prices. Compaq, Dell and H-P are
showing the strongest momentum in the U.S.
Europe (24% of sales): As we have noted before, Europe has
underinvested in information technology, resulting in a decline
in worldwide share from 30% in 1994 to 24% in 1996, but there
have been clear signs of an upturn in the second largest market.
To us, it appears that the spending was showing up first in PCs
and networks and moving upstream to PC servers --- and we would
expect to see it spill over into high-end systems next. Compaq
is number one in Europe; IBM, Dell or a "local hero" usually take
the next few positions. We think that Sun's business should also
strengthen here.
Japan (16% of revenues): The Japanese PC market has declined this
year - around 10% or so - owing to a number of factors. These
factors include a VAT tax increase in 1Q97 which led to an
acceleration in spending and a falloff after that; the moratorium
in the aggressive pricing that we saw in 1996; a shift by NEC to
the Wintel standard in 3Q97 which has created some confusion.
However, these factors are diminishing and we are seeing signs of
a pickup - although Japan faces a very tough comparison against
1Q97. NEC and Fujitsu are the major players in this market; the
U.S. vendors have not gained much share. While IBM leads among
U.S. vendors, Compaq is targeting this market in 1998.
Asia/Pacific (11% of sales): We clearly anticipate a slowdown in
demand from these markets, but the rate of growth in Asia/Pacific
had already slowed to around 20% before the currency crises
emerged owing to existing problems in Korea. There are no clear
market share leaders in the region; in many cases, a "local hero"
is the largest player.
Our premise is not to be unconcerned about developments in Asia,
but to highlight that the PC industry has grown 15%-20% over the
past six years in the face of rolling slowdowns in different
parts of the world at various points including the U.S. and
Europe during that period
BRAND NEWS
Computer demand remained strong in November in both
corporate - driven by server and desktop -- and consumer in view
of lower prices.
The Big Four (IBM, Compaq, Dell, H-P) gained share in 3Q97,
gaining 44% compared to 16% for the overall market and 7% for the
rest (excluding those four).
While there is investor anxiety over channel inventory, we
think the larger issue is the gains by Compaq, IBM and H-P in
shrinking their inventory overhang. At the same time, the
indirect vendors are still transitioning to build-to-order
models.
Compaq - with a third of the server market and 19% of the
desktop market -- continued to see strong growth in business and
consumer. H-P also saw continued momentum in both corporate and
consumer. IBM seems on track with gains in business, but has
lagged because of its weakness in consumer. At the same time,
Dell's momentum remained strong with new products and new
services along with leverage on its internet site.
Stock Picks: Who Benefits From Trends
We would continue to focus on those companies that are positioned
to benefit from the major trends discussed here. Our
recommendations include:
PCs: Compaq Computer (CPQ-56), Dell Computer (DELL-88);
and Apple Computer (AAPL-14) (as a turnaround)
Server/Enterprise Hardware: Hewlett Packard (HWP-61); IBM
(IBM-100), and Sun Microsystems (SUNW-36);
Storage: Quantum (QNTM-19);
Semiconductors (PC related): Intel (INTC-70) and Adaptec
(ADPT-36).
Merced Means More Market to Meander In
We realize that we have to get through 1998 to get to the launch
of Merced - the first chip in Intel's 64-bit processor family --
in 1999. (In fact, we still have to get through 1997!)
However, we believe that the computer industry is on the verge of
major restructuring as they get ready for this new chip. From
our perspective, the key is that it will enable Intel and its
customers to address the high end of the computer industry which
today is a $70 billion market (and would translate to around $8-
$10 billion of potential incremental revenues for Intel).
The launch of this chip will break the "glass ceiling" for Intel
chips (and for their OEMs) at the workstation level and put the
whole Enterprise up for grabs, which would be a major positive
development for Compaq and Dell in particular.
Disk Drives: Waiting For the Consolidation
There are too many disk drive companies making too many disk
drives. We need to see real structural change in the industry
which will mean that certain vendors will exit.
However, we would not expect to see that occur in the March
quarter because most of the players are watching each other
waiting for the other to pull back.
We're not giving up entirely yet: we still have Quantum rated as
a Buy, since the disk drive business is more like its night job -
- it makes its money in the DLT (digital linear tape) business,
which accounts for all of its profits today and almost 80% next
year.
Why Demand Should Remain Strong
In the near-term, we believe that the conditions remain ripe for
continued unit growth in all ends of the industry owing to
several factors:
These factors include (1) new Intel product cycles in desktop,
consumer, server, and notebook product lines, (2) elasticity from
lower prices and better price/ performance for microprocessors,
disk drives, and DRAMs and (3) demand from the business segment
to build powerful "industrial strength" networks. We also expect
two major operating system upgrades: Windows98 in 2Q98 and
Windows NT 5.0 in late 1998 to help drive demand.
Ten Factors Driving Demand Into 1998
Here are the major factors that we believe will lead to 15%-20%
unit growth in 1997 and 1998:
1. Operating system upgrade cycles
2. MMX technology on Pentium and Pentium II
3. Replacement demand
4. Intranets/Internet
5. Portable computers
6. Workstations
7. 100 Mb Ethernet, 56 Kb Technology/ more bandwidth
8. Convergence products: DVD, digital cameras, video
conferencing
9. Systems integration, outsourcing
10. Europe: signs of a turn
Long-Term Growth Should Continue: The Electronic Enterprise
From a macro perspective, we believe that unit demand for
computers may be stronger than expected over the next 5-10 years
because replacement cycles and the growth of the installed base
should spur demand as the application of Moore's law results in
computers that are faster, smaller, cheaper, more powerful and
easier to use.
As we have noted before, we believe that many analysts view that
the computer industry is on the verge of "saturation" because
they compare it to the TV or VCR. These comparisons are not
valid in our view because of the completely distinct dynamics of
the computer business.
The functionality of a TV or VCR has not changed significantly in
the last 10 years. A computer -- in contrast -- is constantly
evolving and becomes "obsolete" within a few months because of
the constant gains in semiconductor process technology along with
advances in software and communications.
Key points to remember:
1. 97% of people in the world do not have a computer.
2. 20%-35% of PCs have to be replaced each year.
Five Important Trends For Long-Term Demand
1. Merging of computing and communications
2. IT spending as a tool to increase competitiveness and spur
productivity
3. Bottleneck elimination: any gain leads to new needs to
upgrade other hardware
4. Advances in semiconductor process technology along the lines
of Moore's law
5. Obsolescence and replacement demand stimulate increasingly
large waves of demand |
