May 31, 2001
Dow Jones Newswires
SMARTMONEY.COM: The Problem With Personal Computers
By MONICA RIVITUSO
NEW YORK -- No wonder PC-watchers have taken to gazing over the horizon: The computer industry's current environs are so darned unattractive. Consumers aren't interested in buying new PCs, corporate spending on information technology has likewise slowed, and economic weakness in the U.S. is feared to have spread to Europe.
And so PC analysts, like tech analysts of all stripes, now spend their days feeling for a bottom and peering through the mists of quarters to come in search of signs of an upturn. Second quarter, forget it. Third quarter, who knows? Do we hear fourth quarter?
Well, maybe. But hopes for a recovery in this industry keep getting pushed out - and they got a little nudge further away on Wednesday, when Gateway (GTW) joined a price war started earlier this year by archrival Dell Computer (DELL). Gateway, which posted a loss of $503 million in the first quarter after sales plunged 15% year-over-year, decided it could brook no more market-share losses and announced it would match competitors' prices on comparable computers for a limited time. Sure, Gateway is taking a page out of Retail Marketing 101. But while it's a direct marketer, like Dell, its higher costs give the company less latitude to turn a profit on lower prices. In the first quarter, Gateway's gross profit margin was 9.7%, while Dell's was 18%.
Now, Gateway's offer to sell comparably equipped PCs for a buck less than Dell, Compaq Computer (CPQ), Hewlett-Packard (HWP), Sony (SNE), Toshiba and IBM (IBM) may stir up a little consumer interest. But overall demand remains fundamentally lackluster. The economic slowdown doesn't help matters, of course, but A.G. Edwards' PC analyst Brett Miller says the real problem is that there still aren't any new, compelling applications that could spark PC sales. If you bought a machine within the last couple of years, it can pretty much handle everything you might want to do on a PC right now. "For the most part, you've seen the PC now in the U.S. market hit a [state] of maturation and saturation," Miller says. Microsoft's (MSFT) new (and much-hyped) operating system, Windows XP, has already been delayed until late October, which means it won't do anything to spur sales in the critical back-to-school season. And even when it does arrive, Windows XP won't offer enough truly new capabilities to drive a lot of sales, he maintains. "The question is, what's the compelling reason for me to have an upgrade? And there isn't one."
A stronger economy wouldn't necessarily help the PC market either, he adds. In 1999 and 2000, a supercharged economic environment helped drive irrational buying, as corporations feverishly poured money into IT departments to keep up with the dot-com boom. Now, he says, as the boom has bust, companies have become more cautious in their spending. They might be tweaking their interfaces for their business-to-business operations or outfitting a leaner work force with laptops to increase productivity. But they're not throwing gobs of money at everything tech-related as they might have in the past. Ultimately, he says, "I think we've had a huge number of anomalies [Y2K fears, the Internet, the dot-com craze] that have masked the fact that the PC has been commoditized."
That stagnation in PC demand is prompting some analysts to question whether the marquee names in the group will meet their forecasts. On Thursday, ABN AMRO analyst Robert Cihra said that "protracted weakness in PC demand" would likely put Compaq's second-quarter earnings and revenue targets of five cents a share and $9 billion "out of reach." Consequently, he trimmed his 2001 and 2002 earnings estimates to 55 cents a share from 65 cents, and to 87 cents from 97 cents, respectively. (Consensus for 2001 and 2002 currently stands at 56 cents and 90 cents, respectively, according to Thomson Financial/First Call.) Cihra also lowered his 2001 revenue forecast for Compaq by $1 billion to $39 billion.
And on Wednesday, Wit SoundView cut its rating on Compaq to Buy from Strong Buy, citing weak U.S. demand and a worrisome European market. Demand for both servers and PCs in the U.S. has been "relatively soft," according to analyst Mark Specker, and European sales - at a minimum - should slow sequentially as the summer progresses. "We cannot justify a Strong Buy rating on a big hardware name in the face of poor fundamentals," Specker told clients in a note Wednesday.
Still, there are some on the Street, such as Prudential Securities chip analyst Hans Mosesmann, who see potential for improvement in the second half of this year. Mosesmann, who covers Intel (INTC), the world's largest maker of PC microprocessors, says the data he's been gathering indicates that the second quarter and second half of the year could be seasonally on track. True, he says, demand for PC motherboards (which in turn is an indicator of demand for PCs) in Taiwan remains weak. Ah, but that doesn't include motherboards Pentium 4s, which Intel is manufacturing itself. Factor in those several million P4 motherboards, he says, and the second quarter could turn out OK. "That's the wild card," Mosesmann says.
Bolstering Mosesmann's relatively optimistic take are notebook sales, which he says are "surprisingly strong." He sees the corporate market rebounding a bit, and notebook sales as one segment of PCs that's benefiting as companies try to boost productivity through more careful IT purchases.
Overall, he expects Intel's second quarter to be in line with seasonal expectations. Granted, this is typically the worst quarter of the year for tech companies. But if this lackluster period turns out to be in line, it implies that the second half of this year will also be seasonal, according to Mosesmann. And typically, the second half is stronger than the first. And after that, the year-over-year comparisons just get easier.
"From an investment standpoint, on the margin, things will get better, not worse," says Mosesmann. "Up and to the right is the direction for business. And up and to the right is the direction of stocks."
Now, if that flat line representing PC sales would only cooperate. |
