Wall Street Journal Interactive AdditionMarch 5, 1998
Tech Investors Hedge Their Betsby Nick Wingfield
".........Intel said demand in its chip business was off mainly due to
lower orders from original equipment manufacturers, or OEMs, primarily
the PC companies that use Intel's microprocessors in the products. But
analysts said they still believe that demand is strong for PCs,
particularly for the sub-$1000 machines that now account for more than
40% of new sales.
"Sales out there are still in line with earlier targets," said Tom
Thornhill, director of technology research at NationsBanc Montgomery
Securities Inc. "All the data points still point to roughly 17% to 18%
unit growth in PCs world-wide in 1998."
The problem for Intel, Mr. Thornhill believes, is that PC companies,
including International Business Machines and Compaq, have jammed
distribution channels with too much inventory in an effort to capture
market share. As a result, the companies now are scaling back chip
orders to clean out older products from channels. "I think we'll clear
that in a quarter or two at the most," said Mr. Thornhill, who added
that he heard about the "channel stuffing" from PC resellers. Intel's
first quarter may also be suffering as more companies streamline their
PC manufacturing operations, reducing their inventories of chips in
the process. Holding excess inventory in unattractive to companies
because of the rapidity with which older, slower chips decline in
value. Intel is "seeing demand contract a bit because of the
willingness of its customers to carry [chip] inventories has
dimnished," said Richard Chu, an analyst at Cowen & Co.
Dell has been one of the primary proponent of the "build-to-order"
model that has helped the company keep inventory levels to a minimum.
Still, Dell was hit Thursday by a ratings downgrade from Mr. Chu,
though the Cowen analyst said he dropped the company to a buy from a
strong buy solely because he believes the issue is too expensive --
not because of the Intel warning. But Montgomery Securities' Mr.
Thornhill said Intel may be facing a more fundamental challenge: a
decline in the average selling price of its chips. Traditionally, the
company has seen its older chips quickly fall in price as it
introduced newer, faster chips, demand for which is driven by newer,
more processor-hungry software applications. The newer chips, which
sell for a premium over the older ones, help boost the average selling
price or ASP of its chip. However, echoing a widely-held view in the
industry, Mr. Thornhill says the power of chips has begun to outstrip
the capacity of software to soak it up. The last big boost the PC
industry received was in August 1995 when Microsoft introduced Windows
95, a major upgrade of its operating system that required more
powerful computers than its predecessor. Soon, Microsoft will release
Windows 98, but that system is a more minimal improvement over Windows
95 and, in most case, won't require a new computer. And the strong
sales of sub-$1,000 PCs has not helped chip companies prop up average
chip prices.Although high power chips are still in demand among certain markets,
including engineering, Mr. Thornhill believes consumers won't cotton
to the zippier machines until faster network connections make video on
demand and other chip-hungry multimedia applications more widespread.
When broadband access is available, "you'll see applications that use
that bandwidth, that then will shift the burden back to the CPU and
graphics performance and we're off to the races again," he said. "That
shift is not going to happen in 1998."
In the meantime, Mr. Thornhill said he's recommending investors put
their money in stocks of bandwidth companies. |
