PC Makers Hedge by Entering Other Businesses as Prices Drop
By Eric Moskowitz
Senior Writer for theStreet.com
3/26/99 11:37 AM ET
An air of doom and gloom looms over the PC sector. As companies prepare their first-quarter earnings reports, rumors of shortfalls threaten to send stock prices tumbling from their highs, and boxmakers ponder how to bolster the bottom line as prices weaken.
Compaq (CPQ:Nasdaq), for one, has seen its stock fall some 30% over two months as the company warned of weakness ahead. Not helping matters is news that insiders at Sun Microsystems (SUNW:Nasdaq), Compaq and Gateway (GTW:NYSE) have been busy selling bundles of stock since January.
That tone has PC manufacturers -- even leaders Compaq, Hewlett-Packard (HWP:NYSE) and IBM (IBM:NYSE) -- scurrying into other businesses to make sure they aren't exposed too broadly to cutthroat price competition in the PC market.
"This is one anxiety-driven quarter," laments Goldman Sachs analyst Laura Conigliaro.
Coming off a strong Christmas season, many analysts were certain the good times for PC manufacturers would continue. But PC Data senior analyst Stephen Baker says the modest decline in demand his firm expects this year looks more serious because of tough comparisons against last year. Baker notes that the year-ago first quarter showed a 50% year-over-year increase in units sold in the retail channel. The growth this year won't approach that, Baker says.
Along with slowing unit sales comes the decline in prices, as the hottest PC sellers continue to specialize in selling sub-$1,000 boxes. In February, the sub-$600 market was the fastest-growing sector, surging 657% from a year ago, according to PC Data. And Seattle newcomer Microworkz is now selling computers for $299, including a year's free Internet access from Earthlink (ELNK:Nasdaq).
A few big companies have sought to boost their bottom lines and goose their stock prices by spinning off noncore units. In January Compaq set its spinoff of Altavista, the search engine acquired in last year's $7 billion Digital Equipment buy. Then this month Hewlett-Packard said it would spin off its measurement division to focus on its mammoth printer and PC business.
Can IBM (IBM:NYSE) be next? IBM has been particularly unsuccessful in trying to eke out a profit from its PC division over the last three years. Merrill Lynch analyst Steven Milunovich, who thinks IBM should get out of the PC business, noted that Big Blue in addition to losing $1 billion in 1998 "was in the red" in 1996 and 1997 also. "Management must address the PC problem," Milunovich told clients. IBM remains committed to the PC space over the long term, said an IBM spokesman.
Both Compaq and H-P's stock prices dropped shortly after the spinoff publicity pixie dust evaporated. IBM, perhaps mindful of this, has been heading in the other direction, into component supply deals.
IBM has signed two mammoth product and licensing deals with leaders in two hardware segments. On Wednesday, the company formed a five-year, $3 billion alliance with data storage leader EMC (EMC:NYSE). This is on top of a seven-year, $16 billion product and licensing deal with Dell (DELL:Nasdaq).
Even direct boxmakers such as Dell and Gateway are moving away from the highly competitive PC space and into services, storage systems and even Internet access. The aim is to further differentiate themselves from being just PC makers.
They have no choice, says Paul Schupf, a New York-based money manager who is short Compaq. "Compaq is already selling its PCs at ridiculous prices and they don't have the low-cost controls," he says. "I'm betting that they are selling boxes now at or below cost."
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