NEXT PHASE. For investors, Dell is certainly better positioned. At its current price of around $42 a share, says Corcoran, Dell is cheap, setting a target price of $50 to $55 a share. So far, Dell offers Internet service provider and Web-hosting services through partnerships. It also provides clients with storage capabilities. But PaineWebber's Donald Young says Dell will have difficulties pushing new products and services, because, unlike Gateway, it sells mainly to large corporations. Dell's shares got hammered when it announced that it would have lower-than-expected earnings for the first quarter because of Y2K concerns. Corcoran estimates Dell will earn $0.95 a share for the year ending January, 2001, compared with $0.68 for 1999.
businessweek.com
PCs: The Big Scramble to Get "Beyond the Box"
PC makers are racing to sell more than just computers, and Gateway is in the lead
To get an idea of how little personal computers figure in the future of the PC industry, take a look at Gateway Inc. (GTW). The San Diego-based PC maker got Wall Street's attention in late February, when it announced several corporate partnerships to create new products and services. It's trying to gather revenues from both consumers and corporate customers -- not by selling more PCs, but with e-commerce, Internet access services, Web sites, and training to go along with its machines (see BW Online, February 24, 2000, "Greener Pastures for Gateway").
Gateway is branching out to offset the inevitable: a slowdown in PC sales. Ashok Kumar, an analyst with U.S. Bancorp Piper Jaffray, who concedes that his outlook for PCs is bleaker than that of most analysts, says this year may be as good as it's going to get. He estimates that worldwide PC sales growth will peak in 2000 at 20%, then taper off to about 10% annually over the ensuing three years, as consumers switch to souped-up cell phones, Palms, and Web boxes to connect to the Net. In Kumar's view, that explains "why you see Gateway scrambling to get out of the box."
Of course for now, the PC market is still going strong. Market researcher Dataquest expects computer makers to sell roughly 130 million PCs in 2000, up from 113.5 million in 1999. (Even long-term pessimist Kumar is an optimist short term: He thinks 160 million PCs will be sold in 2000.) Credit the Net for a lot of this growth, says Mark Corcoran, an analyst with DA Davidson.
COMPAQ'S WOES. In fact, Corcoran has "outperform" recommendations on Apple (AAPL), Compaq (CPQ), Dell (DELL), and Gateway. The one holdout: tech behemoth Hewlett-Packard (HWP). He has a "neutral" rating on the stock while he sees if its new CEO, Carly Fiorina, can recharge the company's PC division. "The jury is still out on HP," he says. On average, Corcoran expects PC makers' earnings to grow 30% this year, and they're currently selling at 40 times their estimates. The exception is HP, which is currently selling at 80 times earnings.
Compaq, the largest PC maker, may have the most difficulty making the transition to a world where PCs aren't the driving force of the computer industry. It is trying to go "beyond the box," with storage capabilities and e-business services. But it still has to get its "house in order," Kumar says, following a string of quarterly disappointments and the departure last year of CEO Eckhard Pfeiffer.
One way Compaq plans to cut costs is by following Gateway's and Dell's lead and selling machines directly to customers. Because it sells more than half of its PCs through resellers, Compaq has been losing market share to Dell, which can undercut Compaq's prices thanks to its direct-sales model. Corcoran is "generally optimistic" that Compaq will get its act together, expecting the company to earn $1.25 a share in 2000, compared with $0.30 in 1999. Louis Mazzuchelli, an analyst with Gerard Klauer Mattison, is less sanguine. "It still has a lot of trouble to deal with," he says.
NEXT PHASE. For investors, Dell is certainly better positioned. At its current price of around $42 a share, says Corcoran, Dell is cheap, setting a target price of $50 to $55 a share. So far, Dell offers Internet service provider and Web-hosting services through partnerships. It also provides clients with storage capabilities. But PaineWebber's Donald Young says Dell will have difficulties pushing new products and services, because, unlike Gateway, it sells mainly to large corporations. Dell's shares got hammered when it announced that it would have lower-than-expected earnings for the first quarter because of Y2K concerns. Corcoran estimates Dell will earn $0.95 a share for the year ending January, 2001, compared with $0.68 for 1999.
Then there's Hewlett-Packard. While the PC division is doing O.K., it's not a high-growth area for the company. Printers provide HP with another product to sell to its PC customers, but that won't carry the company into the next phase of the computer industry, where networks are everywhere and handhelds vie with PCs as the access device of choice.
That puts Gateway in the lead from the investor's standpoint. Last week, it unveiled partnerships with OfficeMax, eSoft, and Sun Microsystems to expand its products and services. As part of its alliance with OfficeMax, Gateway will rent space and set up stores-within-a-store in more than 1,000 OfficeMax outlets.
WALL STREET APPLAUDS. The partnership with Sun will help Gateway penetrate the corporate market. Sun will push its customers to buy Gateway's PCs and laptop computers. In return, Gateway will preload the computers with Sun's Web-application software. And with eSoft, Gateway will be able to manage networks, host Web sites, and provide other services for small and midsize businesses.
Gateway CEO Jeffrey Weitzen expects the new services and stores to double the company's revenue growth to 30% a year, reaching $30 billion in 2004. Gateway's beyond-the-box income is projected to approach 40% of net profits by the end of 2000, up from a previous target of 30%. Wall Street applauded Gateway's strategy. The day of the announcement, Gateway's shares shot up 18%, to 67 5/8. On Feb. 25, the stock was trading at 70 5/8, still below its 52-week high of 84. That gives it a 2000 price-earnings ratio of 30.9. At Bear Stearns, Andrew Neff boosted his rating on Gateway to "buy," from "attractive." Though he kept his estimate for 2000 at $1.82 a share, he raised his estimate for 2001 by $0.10, to $2.30. And Kurt King, an analyst with Banc of America Securities, raised his rating to "strong buy" from "buy."
Says Corcoran: "It's only a matter of time before all the PC companies have some beyond-the-box strategy." Gateway's not waiting around for someone else to prove it can be done.
Witt is a freelance writer based in the New York area
EDITED BY PAUL JUDGE |
