For PC Makers, "The Fourth Quarter Is Going to Be Solid"
BUSINESS WEEK ONLINE
October 25, 1999
STREET WISE by Sam Jaffe
For PC Makers, "The Fourth Quarter Is Going to Be Solid"
So says a top industry analyst, Lou Mazzucchelli. Here's his take on these recently battered stocks
Lou Mazzucchelli has become one of the premier "axes" among personal computer industry analysts: He has the power to chop down a company's stock price by issuing a negative report. Beyond his frequent dead-on calls, he's loved by Wall Street (and hated by some computer executives) for his honest opinions, which can be downright painful if you're stuck with a stock he doesn't like. BW Online Staff writer Sam Jaffe spoke to the Gerard, Klauer Mattison analyst on Oct. 19 about the state of the PC industry and the truckload of news that has battered PC stocks in recent weeks.
Q: PC stocks are taking hits because of a spike in DRAM [dynamic random-access memory chip] prices. Is this a short-term problem, or will DRAM prices continue to rise?
A: It certainly feels shortish. There's a worst-case scenario that says the [DRAM] supply problems will last forever, and there are some bad implications if that's true. But generally what happens is that the supply-and-demand cycle are out of sync. That generally takes six months to a year to correct itself. This is a problem that's resolvable.
It has been exacerbated in Dell's (DELL) case because Dell is on a strange fiscal year, and it got a [DRAM] price increase three weeks before the end of its [most recent] quarter. That doesn't give it any room to maneuver, which is why it had to eat [recent price increases] in terms of gross margins. Some of the other PC makers have a whole quarter to work with, which means you can feather the effects over time. Apple (AAPL) and Gateway (GTW) got whacked, and I don't think they deserved it. The impact [of rising DRAM prices] isn't going to be as severe for those guys.
Countering that, the demand for PC products is very strong. If you have a long-term time horizon and you don't have to take profits before the end of the year, you should be buying these things. The fourth quarter is going to be solid, and next year is setting itself up to be a pretty good year if you are overachieving in this market, as are Apple, Dell, and Gateway. Compaq (CPQ) is a different story, but it went largely unscathed. Hewlett-Packard (HWP), lost four points, and IBM (IBM) was up an eighth, I don't know why. What that tells you is that people aren't thinking about IBM as a PC company, which is what IBM wants.
Q: IBM has announced that it won't be selling PCs in stores anymore. Is that just a retreat, or is it the beginning of the end for its PC division?
A: I think that sets the stage for them exiting the consumer business. I don't know why they haven't done it already. I guess they thought they could make a go of it. Remember, there's a lot of political clout within IBM for the PC division. I think it sold a plan to management that it could make a go of it, and got a green light to try it. If IBM jettisons the consumer PC business, it wouldn't harm [the company].
Q: Meanwhile, we heard from Micron Electronics that it is going to be moving toward a subscription model of PC selling [in which it will try to get small and medium-size businesses to buy Web-hosting and other services along with PCs for one monthly price]. What's going on there?
A: Remember, they won't only be selling by subscription. If you call them up, they'll be glad to sell you a PC. They are trying to transition to this service ("lead with a solution") kind of model, which includes the idea of selling by subscriptions. I give them points for trying it. They weren't tearing up the track doing it the old way. There's not a lot to lose by doing this. The plan they set out is plausible. Whether they can fend off competition when it hits is what we'll have to see.
Q: You count Apple as an overachiever. How much do you like this stock?
A: Very much. The fourth quarter is going to be very strong. Its comeback is for real. Can it screw it up? Sure. But at least it faces the same execution challenges that its competitors face. It doesn't have a survival challenge in front of it. The problems that it had last month sound like its old problems, but they aren't. This time it got sandbagged by Motorola on G4 chips. That's very different from having 15 product lines and not ordering components intelligently, which is what used to happen.
Apple is my favorite stock right now. I have a $90 target on the stock, so I think it's undervalued.
Q: Do you think that Compaq's new CEO, Michael Capellas, is putting the company back on the right track?
A: I would say no. The company is still acting very slowly in terms of moving its meat-and-potatoes desktop and notebook business for corporate customers to a direct model, which is what those customers want. It's also moving slowly in the area of multiple operating systems. Why is it keeping VMS [an operating system Compaq acquired when it bought Digital Equipment Corp.] alive? I can't understand that.
I think the product line could stand some additional rationalization. There are some products I would cut loose just because they are distractions. Compaq still has thousands of jobs to eliminate. The longer that takes, the longer a cloud hangs over the organization.
I don't think things are happening rapidly. I think that Capellas is working too incrementally. So I don't see any changes on the near horizon for these guys. I think they will continue to lose share to Dell in the enterprise business and to Gateway and Apple in the consumer business. I haven't seen any plans or strategies where these guys can get into a position where they can outperform anybody.
Let me give you one example. They did this spinout of AltaVista [Compaq's Internet portal]. They announced it two or three weeks before Capellas was announced as the new CEO. If you're on the board of Compaq and you want to make this guy look good, you would sit on that announcement until you announce the new CEO. Then he can say, "see what a genius I am? I'm doing something."
Either the board of directors didn't know Capellas was going to get the job three weeks before the announcement, which means they didn't have a viable candidate at the time, or they weren't thinking about how to maximize support for the guy when he took the job. That tells me that something organizationally is still not aligned in this company.
I'm sure he's a nice guy, but he really is untested in this position. He has never run a business unit [with sales of] more than $40 million. Now he's running the whole company, and I don't know if he has any support. These guys don't have a lot of time. It isn't like Apple, which had a lock on the Macintosh market. If you're a Wintel customer, you don't have to stay with Compaq. You can get [a PC] from 14 others. |
