Stock of the Day
Feb 08, 1999
Compaq: Going for Big Bucks on the Net
Is Compaq Computer (NYSE:CPQ - news) about to change its name
to Compaq.com? Probably not, but the company is going to be
relying a lot more heavily on the Internet as time goes on.
Just a few days after Compaq announced a slam-dunk fourth quarter, one that saw Compaq beat
estimates by 6 cents, the company's Chief Executive, Eckhard Pfeiffer, announced that the Internet was
going to play a much larger role in Compaq's future. In the company's effort to remain a top competitor
in the PC business, Mr. Pfeiffer disclosed the company was forming a new division that would make its
Web site, Compaq.com, much more visible and much more productive.
"The focus of this new organization is to fully leverage the Internet to not only sell systems and
solutions, but also to build stronger relationships with our customers," said Pfeiffer in a statement.
If Compaq's new enterprise doesn't sound all that revolutionary, that's because Dell Computer
(Nasdaq:DELL - news) , Gateway Computer (NYSE:GTW - news) , and others have already been there
and done that. Dell, in fact, does some $10 million a day on its Web site. Compaq, on the other hand,
does just a fraction of that. Mr. Pfeiffer, though, is encouraged by Compaq's recent quarter, and hopes
to make the Internet a much larger contributor to the company's overall success.
The early results are promising. The company's newest computer, the Prosignia, designed for direct
sale to customers, is said to be selling at a brisk pace. Employing a combination of Internet and
telephone selling, early indications suggest that Compaq may be on to something with its new line of
computers. According to company officials, the Prosignia is fetching $400 more than the average
Compaq computer. The difference in price, officials say, is because direct buyers tend to buy more
expensive computers that have all the bells and whistles.
No doubt Compaq is happy about its early success on the Internet, but the company is looking for even
more success in the near future. Compaq officials told Reuters that during the next few months it hopes
to sell 1 million computers on its Web site each month. That seems overly ambitious when you
consider the amount of success that Dell currently enjoys.
At Dell's current rate of doing $10 million a day in sales on the Internet, that comes out to about $300
million a month. Compaq, though, is saying that it can reasonably do at least $600 million a month,
assuming -- quite low in our estimation -- that it sells each unit for $600. If you assign each unit an
average selling price of $800, the revenues for the month come out to $800 million. Compaq officials are
content with analysts' views that the company will do nearly $43 billion in revenues during 1999, which,
if the company were to do $600-800 million a month in Internet sales, would represent nearly 25 percent
of the company's overall sales. Whether Compaq can pull off its plans is questionable, but the point to
be made is that Compaq is expecting big things from the Internet.
Another area of the Internet that Compaq hopes to cash in on is its AltaVista.com unit. The company
expects to spin off just a portion of the Internet search company, making Compaq a majority
shareholder in the future company, which hasn't yet filed registration papers with the SEC to go public.
Considering the mania surrounding all things Internet, the payoff to Compaq through its ownership of
AltaVista shares could be handsome. Still, that doesn't mean you should rush right out and snap up
shares of Compaq.
Some say that AltaVista could be valued at between $2 billion and $5 billion, or $1 to $2.50 a share to
Compaq (based on 1.7 billion shares outstanding). Considering the nearly 6 percent pop in Compaq's
stock on the day of the announcement that Compaq would spin off AltaVista, it could already be too late
for those looking to play AltaVista through Compaq. Clearly, then, the company looks to do much better
playing AltaVista than do prospective shareholders who may have thought about using Compaq as a
proxy for the impending IPO.
Compaq's future could be sidetracked by a less-than-robust demand for personal computers, or by
AltaVista entering a market when investor sentiment may not be so hot for Internet issues. However, if
Compaq can achieve its ambitious goals, investors will be glad that they took a chance on the
company. |
